Debates in Charity Law 2020931286, 9781509926831, 9781509926855, 9781509926848

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DEBATES IN CHARITY LAW Charitable organisations occupy a central place in society across much of the world, accounting for billions of pounds in revenue. As society changes, so does the law which regulates nonprofit organisations. From independent schools to foodbanks, they occupy a broad policy space. Not immune to scandals, sometimes nonprofits are in the news for all the wrong reasons and so, when they are in the public eye, regulators must respond to high profile cases. In this book, a team of internationally recognised charity law experts offers a modern take on a fast-changing policy field. Through the concept of policy debates it moves the field forward, providing an important reference point for developing scholarship in charity law and policy. Each chapter explores a policy debate, setting out the fault-lines in play, and often offering proposals for reform. Two important themes are explored in this edited collection. First, there is a policy tension in charity law between its largely conservative history and the need to keep up-to-date with social change. This pressure is felt acutely along key faultlines, such as the extent to which a body of law which developed before the advent of legislated human rights is able to adapt to a rights-based world, and the extent to which independent schools – historically so closely linked with charity – might deserve their generous tax-breaks. The second theme explores the law from the perspective of a good-faith regulator, concerned to maximise the usefulness of charities. From the need to reform old organisations, to the need to ensure that charities enjoy the right amount of regulatory freedom in a world of payment-byresult contracts, the book critically charts the policy justifications for regulatory intervention, as well as the costs that such intervention might bring. Debates in Charity Law will be of interest to both academic researchers and students of the nonprofit sector, looking to understand the links between law, social change and regulation. It will also help and guide nonprofit employees and volunteers, showing how their sector is shaped and moulded by the law.

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Debates in Charity Law Edited by

John Picton and

Jennifer Sigafoos

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2020 Copyright © The editors and contributors severally 2020 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2020. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. Library of Congress Control Number: 2020931286 ISBN: HB: 978-1-50992-683-1 ePDF: 978-1-50992-685-5 ePub: 978-1-50992-684-8 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

ACKNOWLEDGEMENTS This collection brings together expertise from charity law scholars from around the globe, including our wonderful colleagues in the Charity Law and Policy Unit at the University of Liverpool. We both have been enriched by workshops and seminars over the years with our colleagues and many of the contributors to this volume. Informal discussions and general bonhomie have also made this a stimulating place to work on this topic. We would like to thank each of our authors for their important contribution. We appreciate your time and effort, as well as your willingness to respond to editorial feedback throughout this process. The field of charity law is rich, with work ranging from the theoretical to the practical, and we are confident that we have brought together an engaging sampling of the very best that the field has to offer. We would also like to extend our thanks to the editorial team at Hart Publishing, in particular Kate Whetter, for her patience and insight in developing this project to publication. Dr Karen Atkinson, also of the Charity Law and Policy Unit, has provided peerless editorial assistance. Her contribution goes beyond even this, however, as she has provided insight through thoughtful comments on chapters’ structure and rigour. This volume was immeasurably improved by her participation, and we are grateful. We also thank the academics who have given their time to peer review this work. The critical feedback we received on the book proposal was very helpful. The peer review provided for individual chapters has helped to tighten and focus arguments, as the very best peer reviewing can. This book is the tip of the iceberg, buoyed up by the huge voluntary contribution that makes academic research work. Finally, we would like to thank our families and friends for their help and encouragement. In particular, John would like to thank Arthur and Marian Picton for their support over the years. Jen would like to thank Mike and Gabriel, who make it all worthwhile. John Picton and Jennifer Sigafoos September 2019

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TABLE OF CONTENTS Acknowledgements��������������������������������������������������������������������������������������������������������v List of Contributors����������������������������������������������������������������������������������������������������� ix 1. Fault Lines in Charity Law������������������������������������������������������������������������������������1 John Picton and Jennifer Sigafoos 2. Independence and Accountability in the Charity Sector������������������������������������13 Matthew Harding 3. Debating the Extent of Party/State Control Over Overseas Nonprofit Organisations: Charity Law Debates in China����������������������������������37 Mark Sidel 4. Regulating Egoism in Perpetuity�������������������������������������������������������������������������53 John Picton 5. Deploying Communitarianism Bankruptcy Theory to Rescue Insolvent Charities and Maintain Charitable Purposes�����������������������������������������������������81 John Tribe 6. When Should Charities be Allowed to Discriminate? The Case of Single-Sex Services and Transgender People�������������������������������������������������103 Jennifer Sigafoos 7. Regulating Charitable Activities through the Requirement for Charitable Purposes: Square Peg Meets Round Hole���������������������������������������������������������129 Adam Parachin 8. Redefining the Regulatory Space? The First Forays of the Irish Charities Regulatory Authority�����������������������������������������������������������������������������������������155 Oonagh B Breen 9. Independent Schools in Scotland: Should they be Charities?���������������������������179 Patrick Ford 10. Licking their Own Lollipops: What do Charities and the Public Think about the Regulation of Charitable Activities?���������������������������������������207 Eddy Hogg 11. Commissioning of Services by Charities in the Third Decade of the Contract Culture: Lessons Learned (or Not Yet)������������������������������������231 Debra Morris

viii  Table of Contents 12. Regulating the Digital (Currency) Revolution: Unravelling the Technological Challenge Faced by Charities�����������������������������������������������257 Matthew Robert Shillito 13. Social Housing – Charities and Vulnerable Groups�����������������������������������������279 Warren Barr 14. Charity Law and Policy: Looking Forward�������������������������������������������������������301 Jennifer Sigafoos and John Picton Index��������������������������������������������������������������������������������������������������������������������������313

LIST OF CONTRIBUTORS Warren Barr is Professor of Law at the University of Liverpool. Oonagh Breen is Professor of Law at University College Dublin. Patrick Ford is an Honorary Research Fellow at the University of Dundee. Matthew Harding is Professor of Law at the University of Melbourne. Eddy Hogg is Lecturer in Social Policy at the University of Kent. Debra Morris is Professor of Law at the University of Liverpool. Adam Parachin is Associate Professor of Law at York University. John Picton is Lecturer in Law at the University of Liverpool. Matthew Shillito is Lecturer in Law at the University of Liverpool. Mark Sidel is Doyle-Bascom Professor of Law and Public Affairs at the University of Wisconsin-Madison. Jennifer Sigafoos is Senior Lecturer in Law at the University of Liverpool. John Tribe is Senior Lecturer in Law at the University of Liverpool.

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1 Fault Lines in Charity Law JOHN PICTON AND JENNIFER SIGAFOOS

I.  Debates in Charity Law The last decade has seen a period of rapid change in charity (or non-profit) law and policy, both in the UK and across common law jurisdictions. Economic turmoil and austerity have changed the policy landscape. New regulators have been created; others have been significantly empowered; while still others have had their wings clipped. Throughout the common law world, charities are embedded in the daily lives of citizens – through schools, hospitals, parks, museums, etc – both as service users themselves or through volunteering or employment to support others. The public feels ownership of charities, and reform to the field inevitably carries policy controversy with it. A great many ‘debates in charity law’ have emerged during this period of rapid transformation and public critique. This volume will explore emergent, policydriven questions in the context of the changed contemporary landscape. We are very pleased to be able to present to you this collection of chapters, each of which considers a contemporary debate in charity law. A major debate that can be seen throughout all of our contributors’ chapters relates to power: what is the right level of state control and regulation of charities? This is explored, from theoretical justifications for legal and regulatory interventions, though implementation, to specific policy contexts. Within this over-arching theme, two secondary themes are mapped through the volume. In the first sub-theme, contributors will explore a fundamental policy tension in charity law between its – largely conservative – history and the necessity for charity law to keep track with fast-moving social change. They will consider some of the theoretical underpinnings for why charities are afforded special treatment under some circumstances, and whether this can be justified or, perhaps, extended. In the second sub-theme, our contributors will delve still more deeply into the regulatory environment affecting charities. A new regulator and expanded regulatory powers over charities will be explored. Other contributors will tackle different issues that might previously have been considered beyond the scope of charity law and will show how this new legal landscape affects charities.

2  John Picton and Jennifer Sigafoos

II.  Old Law, New Shoes In the first half of the book, our contributors consider some of the fundamental doctrines underpinning charity law, while venturing far from its equitable roots. The distance travelled from the past is sometimes thrown into high relief when the traditional common law of charity encounters modern legal concepts. The ­chapters from Matthew Harding and Mark Sidel begin with a key debate that must be resolved in every jurisdiction with a voluntary sector – where should the balance be between preserving the independence of the sector and ensuring adequate state regulatory control over the ordinarily considerable advantages that the sector receives from the state? In Chapter 2, Matthew Harding offers an elegant argument from the liberal perspective for the independence of the charitable sector from state regulatory control. He first considers the elements of the charity sector that might justify independence from the state. The sector produces a multiplicity of goods, driven by the diversity of purposes that are held to be charitable. The charity sector thus has a hand in a number of different enterprises, from hospitals to schools to the arts, which are publicly beneficial to society. This, on its own, is not enough to sustain an argument for the independence of the sector without two further elements: voluntarism and altruism. Harding notes that there is a special value in liberal thought for voluntary action to produce diverse goods. This value in voluntarism distinguishes the goods produced by the sector from those produced by the state. The last element, altruism, then distinguishes the charitable sector from the forprofit sector, another voluntary producer of plural goods. Although altruism may be expressed elsewhere, in the state or the for-profit sector, or those in the charity sector may not have purely altruistic motives, the demands of charity law uniquely structure the sector towards altruism. In Harding’s argument, this positioning of the charity sector as a site for the altruistic and voluntary production of plural goods justifies considerable independence of the sector from the state. Too much state interference might disrupt this altruism, and without the charity sector this altruism may well not be expressed elsewhere. Harding then considers whether the types of accountability that the state can offer to regulate the charity sector are well-suited to maximise the voluntary and altruistic production of plural goods. He discusses three types of accountability: constitutive accountability, stakeholder accountability, and governance accountability. On constitutive accountability, the accountability required by the state in terms of determining which organisations may be charities, he discusses a range across various jurisdictions. He considers that the legislative reforms in England and Wales in 2006, and their interpretation in the Independent Schools case, may diminish diversity in the charity sector in England and Wales and could be considered to be excessive government interference with charitable independence. Harding then looks at stakeholder accountability and the rise in new public management or contract culture. The rise in government contracting to charities for the provision of services may also lead to reductions in the voluntarism and

Fault Lines in Charity Law  3 altruism of the sector, and direct government provision may be preferred in some situations. Finally, he discusses governance accountability, the various restrictions imposed by the state on how trustees must manage and use charitable assets. Restrictions on how trustees may manage charitable assets could restrict voluntarism in an unacceptable way as the goals of the restrictions become increasingly remote from the overall goal of ensuring that charitable assets are reserved for charitable purposes. The chapter thus unpicks and considers critically many of the assumptions underlying discussions of appropriate charitable regulation. In contrast, Mark Sidel’s valuable contribution in Chapter 3 illustrates how this debate plays out in a state with a very different political philosophy. He offers insight into how the fault-lines in charity law and regulation look different when viewed through the lens of an authoritarian state, with China as a case study. Sidel begins with a tension that exists in authoritarian countries: they both value civil society and fear it. As a result, the Chinese charitable regulatory system is very tightly controlled, even though China has one of the fastest growing voluntary sectors in the world. Sidel illustrates this by considering the framework that regulates overseas nongovernmental organisations, foundations, think tanks and other non-profits in China. This sector is the most worrisome for the Chinese Government. China historically engaged with foreign missionary, non-profit and foundation for development and other projects. This was abruptly terminated with the Cultural Revolution. Sidel shows that limited re-engagement began in the 1950s, well before the end of the Cultural Revolution in 1976. The result of this was that China was more open to overseas non-governmental organisation (NGO) engagement in 1977 and 1978 than is generally believed. The subsequent relationship of the Chinese Government to the overseas NGO sector is presented as one of cyclical relaxation and then heightened scrutiny. Through the 1990s there was a period of more relaxed regulation and growth of this sector. The Tiananmen events of 1989 led to some scapegoating of overseas NGOs, and consequent tightening of regulatory oversight. From 2012, things have changed considerably, with tighter regulatory scrutiny and oversight, a harder position, and an increased role for the state in everyday life. The passage of the Overseas NGO Law set out a new regulatory framework for overseas NGOs, foundations and other nonprofits in China. They must register in China with an approved Chinese partner and report through the Ministry of Public Security. Both of these have proved to be difficult for overseas NGOs to accomplish. Despite all these restrictions, some hundreds of overseas NGOs, nonprofit and foundations have managed to register or to report their activities. Thus, Sidel points out that the system is more nuanced than a mere closing down of this particular policy space. He also identifies some grey areas where there may be limited potential for expansion, especially around academic exchange and cooperation. After describing the new policy space for the non-profit sector in China, Sidel offers a typology of the remaining NGO sector, providing insight into how organisations have adapted and what encompasses their ‘new world’ in China.

4  John Picton and Jennifer Sigafoos The chapters written by John Picton and John Tribe both touch on the historic equitable doctrine of cy-près – the power of courts to amend a charitable trust where the original purpose cannot be carried out to apply those funds in a manner as near as possible to the original intent of the settlor. Picton and Tribe have taken this traditional doctrine and used it in distinctly modern ways. Picton prises open and examines the perpetual character of charitable trusts, using donative economics theory as a lever. Tribe advocates for a modified form of cy-près to ensure that charitable assets are preserved in the event of charitable insolvency. In Chapter 4, John Picton argues that the drive to create a perpetual foundation is per se egoistic. Donors who are motivated to create an entity which will last forever are often in the vain pursuit of personal legacy. Rather than being driven by a desire to do good in the world, or to increase social utility, they wish to establish a perpetual memorial to themselves, and to project their character and values into the future. Picton thinks that legal perpetuity, in the form of the ever-lasting charitable trust, can be justified at law because it encourages donors to part with capital. This is true even though the primary motivation might be an egoistic desire to achieve a type of legal immortality. This is an extremely powerful drive and the legal system would do well to attempt to harness it for the public good. Yet the perpetual trust is certainly a double-edged sword. The problem is that donors who are motivated by the projection of their own character and values into the future are unlikely to create trusts with high social utility. Their vanity crowds out more useful applications of the capital. So, it can be said that, although the law is right to try and capture the egoistic drive to perpetuity, there is also an opposing policy imperative to permit the legal reform of perpetual organisations so that their usefulness can be increased. This leads the analysis to a dilemma. On the one hand, a legal system that allows perpetuity increases donation, but on the other hand, it proactively encourages the establishment of vain and wasteful organisations. Picton suggests a method to reform the law of perpetuity in a way that might balance these conflicting concerns. He argues that trusts might enjoy a period of immunity in which they cannot be reformed, but after that period has passed, funds should be directed towards social utility by the state. This would represent a compromise between the donor’s drive to egoistically project her image into the future, and the state’s interest in ensuring that charitable funds are spent effectively. John Tribe’s Chapter 5 looks at the incorporated charitable form through a lens of heated debate in the for-profit world – ie, the extent to which organisations should be ‘rescued’ upon insolvency. There has been a real dearth of research into charitable insolvency, and Tribe’s chapter goes a long way towards correcting that omission. He argues that communitarian rescue culture, which is now very well-entrenched in company law thinking within the Academy and which strives to maintain insolvent businesses as going concerns, might be applied to the charitable context.

Fault Lines in Charity Law  5 Similarly fitting old doctrine into a new frame, Tribe shows that communitarian rescue is the correct approach in the profit-making context, disposing of free-market arguments to the contrary. It flows from this that communitarianism must be of at least equal value in the non-profit sector, which has as its sole purpose the pursuit of public benefit. In turn, it can be said that the law should strive, in circumstances of charitable insolvency, to ensure that the charitable purposes inherent to the insolvent organisation can continue to be carried out. It is also necessary to think carefully on questions of priority, so that upon­ insolvency, the charitable purposes are carefully protected against claimants. For Tribe, the tool to make sure that purposes do continue is the venerable charitable cy-près doctrine, adapted to a new insolvency context. The growth of the incorporated charitable form is only rarely commented upon. However, it marks, from the perspective of a lawyer interested in legal mechanisms and the interplay of different case-law and statutory principles, one of the most profound shifts in the way that charity is regulated. In this intriguing and under-researched context, Tribe’s analysis seeks to make the two sets of legal thinking ‘speak’ to each other – so in this instance, company law, might learn from the older cy-près rules developed in relation to charitable trusts. Adam Parachin and Jennifer Sigafoos offer differing takes on to what extent a charitable purpose should reign supreme when it is contrary to public policy or discriminatory. This is a debate that we see played out repeatedly in the contemporary scene. Charities and controversy are no strangers. In Chapter 6, Jennifer Sigafoos explores a topical social debate: can a charity exclude transgender women from its women-only services? There is a complex interaction between equality law and charity law in the UK. Equality law is a relative latecomer to the scene, and sometimes is an uneasy fit with the centuries of common law development of charity. Charities have been discriminating for a long time. Many charities define whom they help by reference to a specific protected characteristic under the Equality Act 2010, such as sex or race. Sometimes this discrimination is lawful under the Equality Act, while at other times it is not, requiring interpretation of a complicated framework of exceptions. Conflict thus arises between charity and equality law, and it is difficult for charities and their beneficiaries to navigate this legally complex area. In the chapter, Sigafoos uses a case study of a hypothetical charity that wishes to restrict its services to exclude transgender women. She evaluates the charity’s position under the various exceptions to the prohibitions against discrimination in the provision of services under the Equality Act. This case study also raises issues about the broader justifications for charitable discrimination more generally. When does the discrimination that is widespread in charities (some might call it specialisation) become ‘real’ discrimination? Using different perspectives on the theoretical justifications that underlie equality law, Sigafoos expands from the case study to consider this broader debate in charity law. When should it be acceptable for charities to exclude ­potential

6  John Picton and Jennifer Sigafoos ­ eneficiaries based upon a protected characteristic, and when should this be b unlawful discrimination? She argues that we should expect more from charities – charitable discrimination should be lawful only when it is advancing equality in a substantive way, by redressing disadvantage, challenging stigma and stereotype, enhancing voice and participation, or achieving social change. In Chapter 7, making a refined conceptual argument, Adam Parachin delves deep into the DNA of charity law. It is a peculiarity of the common law that each charitable organisation is said to pursue a purpose. This is no more clearly seen than in The Commissioners for the Special Purposes of Income Tax v Pemsel.1 There, the court famously divided the law of charity into four distinct ‘divisions’, with the conceptual effect that judges do not question the particular ways in which organisations carry out their mission – ie, the law does not, as a matter of structure, investigate charitable activities, so long as the charity falls within a Pemsel head. Taking the famous case of Bob Jones University v United States2 as a case-study, Parachin shows that a purpose-focused conceptual legal structure has real-world effects. In the case, where a university carried out religious purposes in a racially discriminatory way, the court reached to public policy in order to find against charitable status. Yet Parachin argues that the judicial use of public policy ­arguments is a blunt tool for dealing with such complex issues. That the court had to resort to policy is a consequence of the purpose-driven DNA of charity law which, as a general rule, permits organisations to carry out their charitable objects in any way that they wish, reining them in only in extreme circumstances. The traditional purpose-focused legal structure has worked satisfactorily for a long period, but it is now under pressure, as the nature of charity has changed in the modern world. Such pressure emerges from the hybridisation of charities with businesses, issues surrounding charities and political campaigning, the charging of fees, and heightened political consciousness with regard to racial ­discrimination. Parachin argues that there might be a legislative solution. Surgical and precise statutory interventions could isolate the circumstances where the traditional purpose-focused approach is under pressure, while at the same time maintaining the common law’s traditionally relaxed and enabling posture in relation to the greater bulk of organisations.

III.  Specific Regulatory Contexts for Charities This second half of the book explores regulation and specific regulatory contexts for charities. Where once research in nonprofit law turned upon the decisions of Equity judges, in more recent times, some authors have focused on the growth of the regulatory state and its consequences for the charity sector. Here our c­ ontributors

1 The

2 Bob

Commissioners for the Special Purposes of Income Tax v Pemsel AC 531 [1891]. Jones University v United States 461 US 574 (1983).

Fault Lines in Charity Law  7 consider closely the regulatory mechanisms that affect charities, beginning with the regulators themselves and then moving on to specific areas where the wider regulatory state has impacted on charities. This type of work brings policy and regulatory guidance to the fore. It requires close attention to how the rules work in practice. This is true for the chapters contributed by Oonagh Breen, Patrick Ford and Eddy Hogg. In her Chapter 8, Oonagh Breen expertly details the regulatory impact of the new Irish Charities Regulatory Authority. She makes the perceptive point that regulators do not arrive into a legal vacuum, but instead must fit themselves into a complex and interlocking pre-existing regulatory system. Her case study, which focuses on Ireland, is timely, as much of the common law world has recently shifted towards the creation of specialist regulators for charities. This global sweep includes New Zealand in 2005, Scotland in 2006, Northern Ireland in 2009, Australia in 2012 and Ireland in 2014. In the Republic of Ireland, a truly complex regulatory picture has emerged. That jurisdiction has gone from a fractured situation where no single body had exclusive responsibility over charities, to one in which the Charities Regulatory Authority is now making its presence felt upon the scene. The first task for this new kid on the block was inevitably the ‘nuts and bolts’ task of managing the new register, created from existing data, by sweeping it of dormant charities. Failure to register while operating a charity is now an offence in Ireland. There have even been prosecutions, so for example in 2017, the Charities Regulatory Authority took action against the ‘Twist Charity’ for advertising, requesting and accepting donations for an unregistered charitable organisation. This is a brave new world. While this change seems broadly positive, Breen shares insightful criticisms of the process. She notes that the Charities Regulatory Authority was slow to produce guidance, something which is absolutely essential in a new legal environment. She also charts the potentially uneasy relationship – a ‘clash of the titans’ – between the Revenue and the new Charities Regulatory Authority. However, Breen notes that the two bodies might be able to work together in future through the development of memoranda of understanding, a model that is followed throughout the common law world. Much more difficult is the complex interface between charity law and com­­ pany law. There, taking a comparative approach, Breen looks to the Charitable Incorporated Organisation in the UK. That new type of legal form is an especially tailored, incorporated charitable form, which might be of interest in Ireland’s quest to develop a new regulatory landscape. As charities regulation shifts away from its historic base in Equity and Trusts, the diverging jurisdictions still have much to learn from each other. Patrick Ford’s Chapter 9 focuses on the specific challenges faced by the new Office of the Scottish Charity Regulator as, in common with the Republic of Ireland, Scotland has also become a global regulatory leader with a specialist regulatory body of its own. In that context, Ford tackles one of the most pressing non-profit issues of our times – the status of independent schools and their

8  John Picton and Jennifer Sigafoos regulation. In the light of post-Barclay Review3 moves in Scotland to remove non-domestic rate relief, Ford presents a balanced assessment of the regulatory scene. Ultimately, he suggests a shift to a more tailored regulatory approach, combined with the intelligent use of tax benefits to encourage schools to fall into line. ­Weighing the policy options with clarity and precision, he concludes that a local-level and discretionary tax approach, if it were adopted, has the potential to empower local authorities to pro-actively manage schools at the community level. In relation to independent schools, the Office of the Scottish Charity Regulator has real regulatory teeth. Notably, it can assess the fees that independent schools charge on the basis of reasonableness. It is also free from the obligation to take account of the complex and contested law on public benefit in England and Wales, which has hampered attempts at reform in that jurisdiction. Through clear guidance, the Office of the Scottish Charity Regulator straightforwardly states that in meeting the reasonableness assessment, facilitated access – help for those who cannot pay, such as bursaries and discounts – is likely to have the greatest impact. Even so, the regulator operates a holistic test that allows it to take account of the full scope of the benefits provided by the school. Favouring sensitive regulation of the independent school sector in Scotland over a more dramatic policy alternative that would involve the full removal of their charitable status, Ford ultimately shifts his focus of attention to the position in England and Wales. He notes that there, the Charity Commission does not have the same powers as the Scottish regulator, and so its regulatory position is undoubtedly weaker. Thus, if reforms are to be attempted, England and Wales should be understood as facing a choice between the legislative clarification of the public benefit requirement, or the removal of charitable status from independent schools altogether. If England and Wales were to choose the latter option, it is unlikely that Scotland, which is now on its own regulatory path, would follow suit. England and Wales have long had their own specialist regulator. In that more established legal context, Eddy Hogg takes a novel approach to research in charity regulation in Chapter 10, opening the way to a fruitful line of future analysis, which could be repeated in any common law jurisdiction. He asks what the charities themselves and the general public actually think the law should do. Using interview data to support his writing, he argues that donors do not always clearly understand the ‘nitty gritty’ of how charitable organisations are regulated. He also shows that organisations in the sector want regulation to be supportive and not overly burdensome. Hogg uses public interest theory to frame his analysis, noting that regulation is best conceived as being for the benefit of society as a whole. This includes a broad range of stakeholders: donors, the recipients of charity, wider society and the charitable organisations that must comply with the law. It is intuitive that those



3 Kenneth

Barclay, Barclay Review of Non-Domestic Rates in Scotland (Scottish Government, 2017).

Fault Lines in Charity Law  9 most closely involved in regulation – charitable organisations and donors – are a very important starting point in any attempt to research the appropriate function of the law. Hogg shows that what is already known misses important nuances. So, for example, large charities might have very different attitudes than smaller organisations within the sector. Hogg’s chapter can be understood as a call to arms. His research shows up a fault-line. On the one side are those who think that the regulatory burden on charities should be as light as possible. On the other are those who think a system of hands-off regulation might lead to a situation where charities can do whatever they please, without true oversight, and without meeting the normative requirements of public interest theory. Or, put another way, some people are concerned that charitable organisations ought not to be left to ‘lick their own lollipops’. A major theme in this volume is the assessment of the extent to which non­­ profits are impacted by challenges that are not within the scope of the body of ‘textbook’ rules traditionally known as charity law. There are a series of bespoke regulatory challenges currently impacting the sector which stretch the limits of conventional charity concepts. Debra Morris, Warren Barr and Matthew Shillito all productively assess this charity hinterland. In Chapter 11, Debra Morris expertly analyses the payment by results (PbR) contract as it is applied to non-profits. Over the past three decades in the UK, we have seen considerable growth in the outsourcing of core state services to the voluntary sector. The growing influence of market incentives in the provision of social welfare services, as well as unprecedented cuts in public expenditure under austerity measures in place since 2010, have made these contractual relationships increasingly pressured. The PbR contract has been growing in popularity as a model for funding public services. In a PbR contract, the service provider is only paid if certain agreed results are obtained. These results may well be outside of the service provider’s ultimate control. A contract for the provision of job search coaching to the unemployed might be assessed by the number of persons who re-enter employment, for example, rather than by the number of users to whom a coaching service is provided. These contracts are attractive to government funders because they carry little risk to the funder, but they may well be too risky for the service provider. Morris analyses studies of the results of PbR contracts and determines that they carry significant risks for the charity sector. She then considers various mechanisms that might make PbR contracts safe for charitable use, including subcontracting and the use of Social Impact Bonds (SIBs). In a SIB, private social investors front-up capital to fund the PbR contract, and they are paid back if the contract is successful in its outcomes. Investors, not charities, thus bear the financial risk of contract failure. Morris considers the evidence about how well SIBs work in practice and concludes that they are not yet fit for purpose to enable charities to take part in PbR contracts with confidence. She concludes that the PbR funding environment may well prevent charitable participation in the provision of public services participation. This is a loss for both charities and their potential beneficiaries, as well as for the mixed economy of service provision.

10  John Picton and Jennifer Sigafoos Her chapter is a landmark exploration of an issue that affects many charities today and promises to continue to confront the sector for many years. Taking a bold step into a new regulatory landscape, Matthew Shillito tackles an innovative concept in Chapter 12 – digital currencies – and considers how and whether they might be able to be used by charities. Digital currencies are the most recent form in which value can be stored. They offer great potential that charities may be able to harness. Shillito begins by discussing some of the advantages of digital currencies. They may well draw new potential donors to charities, as individuals with profits in digital currencies might look to donate some of that value to charitable causes. There are also technological advantages with transferring money, and if digital currencies become more widely adopted, they could offer ways for charities to conduct their international financial affairs without fear of triggering de-risking by banks. Most excitingly to us, in light of desires for the sector to be more transparent in how donated funds are spent, the payment medium offers unparalleled transparency. A truly transparent charity could offer donors the ability to follow their funds through the blockchain and see how the funds are ultimately spent. This transparency could well spur further donation as people could see their donation’s end goal. Having set the scene for why charities should be excited to consider the advantages of digital technologies, Shillito then goes on to assess the challenges that the regulatory regime presents to this at present. After considering the wider academic literature on regulation of new technologies, he analyses the regulatory challenges for digital currencies in light of the learning from struggles to regulate other new technologies. He points to the limited competence of potential regulators, as well as a lack of appetite for regulation. This is alleviated in Europe by the competence of the European Union, which has implemented the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (FATF Recommendations) via directives. Nevertheless, appetite for regulation lags even in Europe, and Shillito points out that international efforts to curb financial crime through digital currencies will only be as strong as the weakest state. Even where regulation is attempted, its effectiveness is problematic when applied to digital currencies. Although Bitcoin is transparent, it is difficult to link it to a particular owner, where that owner does not wish to be identified. If the owner is identified, it can be impossible to confiscate the proceeds of crime. Shillito discusses the difficulty of balancing the proportionality of regulation. The regulation of new technologies needs to be weighted appropriately to not stifle innovation, while also precluding illegal or illegitimate activity, and protecting the public. This has proved to be a challenge with past attempts to regulate new technologies, and digital currencies have not proved to be any different. He illustrates the difficulty of this process by reference to the specific case of whether Gift Aid – a form of tax relief where charities can reclaim the basic rate of tax on donations – should be able to be claimed for donations made in digital currencies.

Fault Lines in Charity Law  11 This leads Shillito to point to the big disincentive for charities to be early adopters of digital currencies: as digital currencies are often viewed as synonymous with financial crime, banks are likely to take a cautious view of their use. Any charity that uses digital currencies at the moment runs the risk of raising their perceived regulatory risk, and therefore the chance that a bank may choose to ‘de-risk’ by dropping that charity’s accounts. We thus have a Catch-22: the means by which charities may eventually be able to protect themselves from the risk of being de-risked by a bank is also very likely to lead to that de-risking. Charities may be enticed by the many advantages of digital currencies, but at present the challenges to their use are likely to prevent their adoption by all but those charities with the highest appetite for risk. Finally, while charity law and the social housing sector are no strangers, over a decade of austerity in that sector has thrown up new and acute challenges that stretch old ways of charity law thinking to their limits, forcing a reconceptualisation of what the law can positively contribute to that sector. In his Chapter 13, Warren Barr charts the problems faced by the social housing sector and the role that charities play in the delivery of that essential service to vulnerable people, particularly those who are mentally vulnerable. A bleak picture is painted. Social rented housing is increasingly reserved for people in extreme need, and although a secure home is of very great importance, this security frequently cannot be provided. Charities can do a great deal in this sector. They can act as advocates for mentally vulnerable people, they can raise funds, and in modern times they can access social investment capital. However, there is no doubt that they are being held back. Land values are very high, and this stops more social housing from being developed. Unfortunately, homes for a lifetime are no longer permissible, and tenants might be put on an ‘introductory tenancy’ for their first year, leaving them insecure. Access to specialist support funding is patchy, varying across regions. Vulnerable people also struggle to access legal assistance, even in circumstances where they have been treated unfairly in relation to their tenancy. Charities have responded to this as best they can, perhaps providing specialist legal advice to their own clients, but such an informal system will inevitably be imperfect. Caught in a complex and underfunded regulatory landscape, it might seem as if charities often have their hands tied in relation to social housing service delivery. Yet there is a silver lining to this otherwise dark cloud. Charities can, and very often do, advocate for their clients. They can explain to government the problems that mentally vulnerable people suffer and can lobby for proactive legal change. In this regard, the Shelter Commission has pointed to an optimistic way forward. It calls for £12.8 billion in new funds for the sector. Barr notes that this type of positive advocacy has transformative potential – if there is the policy will to take charities seriously.

12  John Picton and Jennifer Sigafoos

IV. Conclusion Our aim with this volume is to bring together some of the most cutting-edge charity law scholarship in one place. The breadth of topics considered signals the deep penetration of charities into modern society, and also how modern society is penetrating charities and charity law. We are proud to present a book in which our contributors have successfully illuminated a number of debates in charity law.

2 Independence and Accountability in the Charity Sector MATTHEW HARDING*

I. Introduction In this chapter, I want to offer some thoughts on a fundamental question that underpins charity law wherever it is found: to what extent should the c­harity sector be independent of, and to what extent should it be accountable to, the state? Thinking on this question stands to inform a range of legal and policy settings, potentially affecting the legal definition of charity and the public benefit requirement of charity law, government practices when dealing with charities, the orientation and priorities of charity regulators, and the involvement of charities in political processes, among others. The value of independence in the charity sector seems scarcely questionable; after all, this is a sector composed of private citizens organising their time, efforts and resources in pursuit of their chosen purposes. In  a liberal society, it is usually thought that such private action should be free from government interference.1 But on the other hand, by definition the charity

* Thanks are due to Sue Barker, Rachel Leow, James Penner, John Picton, Jennifer Sigafoos and Matthew Turnour for hugely helpful and insightful comments on drafts of this chapter. Particular thanks also to Dan Halliday, with whom I have discussed and workshopped many of the ideas in the chapter and to whom I owe a great intellectual debt. Drafts of the chapter were presented at the ARNOVA conference in Austin, Texas in November 2018, at the Singapore Symposium in Legal Theory at the National University of Singapore in April 2019, and at the ANU Law School Faculty Seminar in October 2019, and I am grateful to all who provided comments at those three meetings. Finally, thanks to the Dean and Faculty of Law at the University of Otago, New Zealand, where I wrote much of the chapter in a congenial and collegial environment. 1 See, eg, J Rawls, Political Liberalism, expanded edn (New York, Columbia University Press, 2005) 268–69 (‘What we look for, in effect, is an institutional division of labor between the basic structure and the rules applying to individuals and associations and to be followed by them in particular transactions. If this division of labor can be established, individuals and associations are then left free to advance their ends more effectively within the framework of the basic structure, secure in the ­knowledge that elsewhere in the social system the necessary corrections to preserve background justice are being made’).

14  Matthew Harding sector pursues purposes of a public character, and it is subsidised and funded by the state to do so.2 Given these facts about the sector, it seems appropriate that the sector’s independence should be curtailed, to some extent, by law and regulation and in other state-sponsored ways. Where, then, is the balance to be struck between independence and accountability? There are many possible starting points when thinking about this question. Here, I start by trying to understand better, from a liberal point of view, why we might value a charity sector that is independent from the state. In Part II, I set out some arguments, grounded in core liberal commitments to diversity and ­voluntarism, for maintaining a degree of sector independence from the state. Then, in Part III, I consider three types of charity accountability to the state in light of the arguments from Part II: constitutive accountability; stakeholder accountability; and governance accountability. I explore the extent to which the demands of charity sector independence, grounded in the value of diversity and voluntarism in that sector, are consistent with those three types of charity accountability. Part IV concludes.

II.  Diversity, Voluntarism, and the Independence of the Charity Sector Diversity is often associated with the value of an independent charity sector.3 Indeed, this association seems evident in light of the multiplicity of purposes that are pursued within the sector. The sector’s diversity of purpose is reflected in charity law itself; the preamble to the Statute of Elizabeth lists no fewer than 10 types of purpose recognised in 1601 as charitable in English law;4 the famous taxonomy set out by Lord Macnaghten in Commissioners for Special Purposes of 2 Matthew Turnour has raised with me the possibility that the contrast between private freedom and public benefit is a false one because, at least from a liberal standpoint, freedom of choice and association in the charity sector is itself a great public good. If Turnour is right, then striking the right balance between the independence and the accountability of the charity sector is probably best conceptualised as a matter of weighing and ordering public goods and choosing between them when they conflict. My arguments in this chapter stand whether or not Turnour’s suggestion is taken up. 3 For recent work emphasising the value of diversity in the charity sector, see Rob Reich, ‘Towards a Political Theory of Philanthropy’ in P Illingworth, T Pogge and L Wenar (eds), Giving Well: The Ethics of Philanthropy (New York, Oxford University Press, 2011) 177; R Reich, Just Giving: Why Philanthropy is Failing Democracy and How It Can Do Better (Princeton, Princeton University Press, 2018) 128–133, 153–155. 4 The preamble, in modern English, refers to ‘the relief of aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners; schools of learning, free schools and scholars of universities; the repair of bridges, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock or maintenance of houses of correction; marriages of poor maids; supportation, aid and help of young tradesman, handicraftsmen and persons decayed; the relief or redemption of prisoners or captives and the aid or ease of any poor inhabitants concerning payment of fifteens, setting out of soldiers and other taxes’. For the original text, see G Jones, History of the Law of Charity 1532–1827 (Cambridge, Cambridge University Press, 1969) 224.

Independence and Accountability in the Charity Sector  15 Income Tax v Pemsel recognises plurality in the heads of charity;5 and modern statutory treatments of the legal definition of charity typically make reference to numerous purpose types.6 Moreover, the history of charity law has been a history of courts recognising as charitable an ever-expanding range of purposes, principally under the ‘catch-all’ fourth head of charity articulated in Pemsel and now its modern statutory analogues.7 The diversity of purpose that has characterised the charity sector since at least the Tudor period seems to have grown richer over time, perhaps unsurprisingly given increasing complexity in social, economic, cultural and political life over the past 400 years. The goods that are produced by the charity sector’s pursuit of diverse purposes range from pure public goods, such as environmental protection and the rule of law, to private goods, such as health care and education. Those goods, just like the charitable purposes that generate them, are diverse, and this diversity is reflected in charity law’s jurisprudence on public benefit, which recognises that such benefit cannot be reduced to a utilitarian or other unifying calculus.8 However, the fact that the pursuit of charitable purposes generates a multiplicity of goods does not by itself establish a strong case for the independence of the charitable sector from the state. This is because the state itself, and the for-profit sector, produce many of the same goods. Of course, it must be acknowledged that in some cases the charity sector produces goods that the state and the for-profit sector are unlikely to produce; for example, for constitutional reasons the state cannot produce goods associated with religious belief and practice, and the for-profit sector is unlikely to provide such goods to the extent that they are non-rivalrous and non-excludable.9 But such cases are relatively unusual. More commonly, the state, the for-profit sector and the charity sector supply public and private goods to the same markets, for example in relation to health care, education, housing, disability support, and the arts. In those more common cases, it seems difficult to argue that an 5 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531, 583 (‘“Charity” in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads’). 6 See, eg, Charities Act 2011 (England and Wales), s 3 (referring to 13 purpose types) and Charities Act 2013 (Australia), s 12 (referring to 12 purpose types). 7 See GE Dal Pont, ‘Charity Law: ‘No Magic in Words’?’ in M Harding, A O’Connell and M Stewart (eds), Not-for-Profit Law: Theoretical and Comparative Perspectives (Cambridge, Cambridge U ­ niversity Press, 2014) 87, but note also GE Dal Pont, ‘The History and Future of the Law of Charity’ in M ­Harding (ed), Research Handbook on Not-for-Profit Law (Cheltenham, Edward Elgar, 2018) 305. 8 National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31, 41–49 (Lord Wright), discussed in M Harding, Charity Law and the Liberal State (Cambridge, Cambridge University Press, 2014) 24–25. 9 This is the gist of economic analysis that points to government and market failures as the explanation for the existence of a not-for-profit sector in a mixed economy. For superb critical descriptions of this scholarship, see R Steinberg, ‘Economic Theories of Nonprofit Organisations’ in WW Powell and R  Steinberg (eds), The Nonprofit Sector: A Research Handbook, 2nd edn (New Haven, Yale ­University Press, 2006) 117; R Steinberg and B Galle, ‘A Law and Economics Perspective on Nonprofit ­Organizations’ in M Harding (ed), Research Handbook on Not-for-Profit Law (Cheltenham, Edward Elgar, 2018) 16.

16  Matthew Harding i­ndependent charity sector is necessary or even important to the production of the goods in question. The more plausible proposition seems to be that even if state interference with the charity sector were to cause that sector to stop pursuing its purposes, this would not necessarily bring about a reduction in the generation of a plurality of goods overall, because the state and the for-profit sector might fill the breach.10 A more promising line of argument in support of the independence of the charity sector from the state notices not only that the sector generates a plurality of goods via the pursuit of charitable purposes, but also that the sector is a site for voluntary action. The idea that the value of an independent charity sector is bound up with its role as a site for the voluntary production of plural goods is familiar in liberal thought. It is connected to the view famously expressed by John Stuart Mill that self-development demands social structures by which individual people may associate freely to pursue their chosen purposes, especially where those purposes are counter-majoritarian.11 If, from a liberal perspective, there is special value in the voluntary production of plural goods, then there seems to be a distinctive role for a charity sector that is independent of the state, at least to the extent that the principle underpinning state action is not voluntarism but rather coercion.12 However, while the fact that the charity sector is a site for voluntary action supports an argument for the independence of the sector from the state, it must be acknowledged that the charity sector is not the only sector of society in which people associate on a voluntary basis in the pursuit of plural, even countermajoritarian, goods. Such association also takes place within the for-profit sector.13 Thus, even in a world where the state interfered with the charity sector to such an extent that the charity sector came to be organised on the basis of coercion rather than voluntarism, plural goods might well still be produced by voluntary action, so long as there remained a for-profit sector sufficiently free from state interference. In seeking to develop the strongest possible argument for the independence of the charity sector from the state, it therefore seems necessary not only to bring into view the plural goods produced by the pursuit of charitable purposes and the voluntary action that animates the sector, but also something more that

10 That said, counter-examples exist: note Catholic Care (Diocese of Leeds) v Charity Commission for England and Wales [2012] UKUT 395 (UT) and its aftermath. 11 JS Mill, ‘On Liberty’ in his On Liberty and The Subjection of Women, J O’Grady (intro) (Ware, Wordsworth Classics, 1996) 73–74, 105–110. See also Tocqueville’s account of associational life in the US and its role in fostering a democratic culture in A de Tocqueville, Democracy in America, HC ­Mansfield and D Winthrop (trs, eds and intro) (Chicago, University of Chicago Press, 2000). 12 This distinction between voluntarism and coercion is reflected in charity law itself, in the jurisprudence drawing a conceptual boundary between charity and government: see Central Bayside General Practice Association Limited v Commissioner of State Revenue (2006) 228 CLR 168 (High Court of Australia). 13 See A Malani and EA Posner, ‘The Case for For-Profit Charities’ (2007) 93 Virginia Law Review 2017.

Independence and Accountability in the Charity Sector  17 shows the charity sector to be distinctive when compared to the state and the forprofit sector. Mill himself alludes to this something more in his writings. In his well-known essay on endowments, he argues that:14 It is desirable that every particular enterprise for education or other public objects should be organised; that is, its conductors should act together for a known object, on a definite plan, without waste of strength or resources. But it is far from desirable that all such enterprises should be organized exactly alike; that they all should use the same means for the attainment of exactly the same immediate ends.

Here Mill alludes to the possibility that there is value in the charity sector not only because it is a site for the voluntary production of a plurality of goods, but also because in the charity sector people do what they do in different ways: hence his reference to ‘means’ as opposed to ‘ends’. Charity law itself points to the distinctive means by which the charity sector operates. Through its requirement that charities be not-for-profit and its public benefit jurisprudence, charity law demands that the charity sector be organised on the basis of altruism.15 Where the purpose of an organisation is to produce profits or other goods for members, controllers or other stakeholders, those organisations are not recognised as charities.16 Similarly, where the purpose of an organisation is to produce goods for a private class, the purpose will fail the public benefit requirement of charity law.17 In these ways, charity law seeks to ensure that in the charity sector people voluntarily produce goods for other people as such, and not only for themselves, or for other people to whom special obligations might be owed, or in exchange for a return benefit. The aim is that people will act on the basis described memorably by Bernard Mandeville in his essay on charities, by which ‘that sincere love we have for ourselves [is] transferred pure and unmixed to others, not tied to us by the bonds of friendship or consanguinity, and even mere strangers, whom we have no obligation to, nor hope or expect any thing from’.18 If a principle of voluntary action helps to distinguish the charity sector from the state, a principle of altruism helps to distinguish the charity sector from the for-profit sector. This is not to say that people cannot be altruistic in a for-profit

14 JS Mill, ‘Endowments (1869)’ in The Collected Works of John Stuart Mill, Volume V – Essays on Economics and Society Part II, JM Robson (ed), Lord Robbins (intro) (Toronto and London, University of Toronto Press, Routledge and Kegan Paul, 1967) 613, 617. 15 See further Harding, Charity Law and the Liberal State (2014) (n 8) 88–102. 16 R v The Assessors of the Town of Sunny Brae [1952] SCR 76 (Supreme Court of Canada) (producing profits for stakeholders) but note also Federal Commissioner of Taxation v Word Investments (2008) 236 CLR 204 (High Court of Australia); Inland Revenue Commissioners v City of Glasgow Police Athletics Association [1953] AC 380 (HL) (producing other goods for members). 17 In re Compton [1945] 1 Ch 123 (CA); Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297 (HL). 18 B Mandeville, ‘An Essay on Charity and Charity Schools’ in The Fable of the Bees or Private Vices, Public Benefits, with An Essay on Charity and Charity Schools and A Search into the Nature of Society (Edinburgh, 1755) Gale Eighteenth Century Collections Online, www.gale.com/intl/primary-sources/ eighteenth-century-collections-online 221.

18  Matthew Harding setting; there seems no reason to deny the possibility of detached and selfless action even within an organisational structure whose raison d’etre is to generate profits for stakeholders. Nor is it to say that people are invariably altruistic in a charity setting: charity directors who are more interested in perks for themselves than carrying out their mission, employees who perform their jobs in order to earn a good salary rather than because they believe in the charity they work for, or donors who seek approbation and fame, might be offered as examples of nonaltruistic actors in the charity sector. It is, rather, to say that the charity sector is distinctively a site for altruism insofar as charity law orients that sector towards altruism by demanding that charity founders form altruistic purposes and by providing opportunities for those who work and volunteer in the sector to align themselves with those purposes. Mill’s point in the essay on endowments is not just that the charity sector operates by distinctive means; his point is that it is desirable that there be diversity in those means. But simply highlighting the structural orientation of the sector towards altruism does not show that the sector operates by diverse means. Indeed, it seems to point to the opposite conclusion, that the sector is a site for the voluntary production of plural goods in just one way, via altruism. How can an appeal to altruism in the charity sector be reconciled with Mill’s point that there is value in the sector insofar as it operates by diverse means? The key is in seeing that there are many different ways to be altruistic. Altruism is best understood as a sort of umbrella virtue under which a range of other, more specific, virtues c­ luster. Those more specific virtues include the virtue of justice, the virtue of charity (­understood now in its non-legal sense to mean a disposition to help those who are ­suffering), the virtue of public-spiritedness, the virtue of mercy, and so forth.19 One way of understanding the passage from Mill’s essay on endowments, then, is that a flourishing charity sector is one in which people voluntarily associate and, by cultivating and expressing a range of altruistic virtues, produce plural goods. On this view, the fact that the charity sector is a site for pluralism in matters of virtue advances the argument for the independence of the sector from the state in a way that facts about the charity sector as a site for the voluntary production of plural goods cannot. How far the argument is thereby advanced depends on the extent to which the state itself is a site for the cultivation and expression of a range of altruistic virtues. If it turns out that the state is such a site, then it seems difficult to argue that diversity in altruistic virtues depends on a charity sector that is independent of the state. As is the case with the for-profit sector, there is no reason to think that the

19 For an insightful account of the differences between the virtues of justice, charity and publicspiritedness, see J Gardner, ‘The Virtue of Charity and Its Foils’ in Charles Mitchell and SR Moody (eds), Foundations of Charity (Oxford, Hart Publishing, 2000) 1; see also J Gardner, ‘The Virtue of Justice and the Character of Law’ in his Law as a Leap of Faith (Oxford, Oxford University Press, 2012) 238. On the virtue of mercy, see J Tasioulas, ‘Mercy’ (2003) 103 Proceedings of the Aristotelian Society 101.

Independence and Accountability in the Charity Sector  19 full range of altruistic virtues could not be cultivated and expressed successfully through the institutions of the state. Indeed, the judge who exercises mercy or the bureaucrat who is public-spirited in her management of an arts portfolio stand as archetypal examples of altruism in state action. However, structural factors suggest that the orientation of state institutions impedes, rather than enables, pluralism in matters of virtue in at least some state settings. Where the state’s scale and reach is large, as it often is, state officials may be detached from the recipients of goods produced by state processes. In such circumstances, there may be limited scope for certain altruistic virtues that are highly responsive to individual circumstances, such as mercy and charity (in the non-legal sense). Moreover, state officials may be embedded in hierarchies and administrative structures that orient them away from the goods produced via those hierarchies and structures and more towards norms internal to the hierarchies and structures themselves. In these circumstances, virtues such as humaneness and public-spiritedness may have less scope than, say, the bureaucratic virtue of fidelity in the discharge of roles and ­functions.20 Finally, coercion seems relevant in at least some state settings; for example, expressing the virtue of justice by paying one’s taxes seems a complicated affair given that taxes are raised by coercive laws.21 The points I have just made should not be taken to mean that the state’s scale and reach are necessarily or invariably large; nor should they be taken to mean that charities necessarily or invariably lack the sort of scale and reach that render charity workers distant from charity beneficiaries or embedded in bureaucratic hierarchies or cultures. There are small, local state programmes and large, impersonal charities. Nonetheless, I think it is plausible to assert that the state’s scale and reach are in most instances far larger than those of the typical charity. This assertion is supported by data from various jurisdictions confirming that most charities – and indeed most not-for-profit organisations – are small when measured in terms of revenue, staff, volunteers and so forth. The contrast between a government department delivering, say, welfare programmes on a national scale, and small charities serving local communities in their particular circumstances, is a reasonable one to draw notwithstanding complexity and exceptions on both sides. Thus, there are reasons to think that the state is not a fruitful site for the cultivation and expression of the full range of altruistic virtues, even if such virtues might be manifested successfully in state settings. In contrast, because charity law structurally orients the charity sector towards altruism, that sector seems not just a possible site for the varieties of altruism, but indeed fertile soil for those varieties to take root and flourish. This proposition, together with the multiple goods produced by the charity sector and the voluntary action that animates that sector, 20 See M Weber, ‘Bureaucracy’ in From Max Weber: Essays in Sociology, HH Gerth and CW Mills (intro), BS Turner (preface) (Abingdon, Routledge, 2009) 196. 21 That said, the coercion entailed in raising taxes seems weak in most cases: see J Waldron, ‘Welfare and the Images of Charity’ (1986) 36 Philosophical Quarterly 463.

20  Matthew Harding grounds a strong argument for the independence of the charity sector from the state. The argument is to some extent an argument that excessive state interference in the charity sector might cause the sector to stop producing certain goods, such as those associated with religious belief and practice, that would not be produced readily by either the state or the for-profit sector. It is to some extent an argument that excessive state interference might diminish voluntary action in the ­charity sector in a way that should trouble liberals. But it is also, and perhaps most ­strikingly, an argument that excessive state interference might reorient the charity sector in ways that reduce diversity in the means the sector employs to voluntarily produce plural goods. Specifically, there is a risk that excessive state interference might interrupt or prevent the cultivation and expression of a range of altruistic virtues in the sector; and because the charity sector is the only sector of society that is structurally oriented towards altruism, in circumstances where altruistic virtues are no longer manifested in the charity sector there is a real risk that such virtues will not be manifested elsewhere. Voluntarism might persist and diverse goods might continue to be produced, but diversity in matters of virtue might be diminished in a way that is of moral concern from a liberal point of view.22 Before turning to types of charity accountability that arguably stand at odds with the independence of the charity sector from the state, I should say something more in defence of the argument from diversity and voluntarism that I have offered in support of that independence. This is because there is a tradition of arguing, even from a liberal point of view, that the voluntary production of diverse goods via altruistic means is not always desirable. For example, such an argument has been raised from time to time in respect of the virtue of charity in the non-legal sense. Consider Mary Wollstonecraft’s exhortation, in the course of arguing that unmarried women should have rights legally enforceable against the fathers of their children: ‘It is justice, not charity, that is wanting in the world’.23 Or ­Clement Attlee’s powerful argument that the virtue of charity is apt to demean the recipient of goods thereby produced, and that the best way to help others in a non-demeaning way is to pay taxes from a sense of justice.24 Or even the argument recently put by Veronique Munoz-Darde and MGF Martin that donors who act from the virtue of charity are emotionally manipulated in a way that should be of moral concern.25 The idea behind these different accounts is that cultivating 22 For an argument, albeit from a communitarian perspective, that a diminution of diversity in matters of virtue is of moral concern, see MJ Sandel, Liberalism and the Limits of Justice, 2nd edn (Cambridge, Cambridge University Press, 1998) 29–35. 23 M Wollstonecraft, ‘A Vindication of the Rights of Women’ in The Works of Mary Wollstonecraft Volume 5: A Vindication of the Rights of Men and A Vindication of the Rights of Women and Hints (London, Pickering and Chatto, 1989) 79, 140. 24 C Attlee, The Social Worker (London, G Bell and Sons, 1920) 8–9, 29–30, 75–78. See also the intriguing statement of Lord Wright in National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31, 42 (‘Again eleemosynary trusts may as economic ideas and conditions and ideas of social service change cease to be regarded as being for the benefit of the community’). 25 V Munoz-Darde and MGF Martin, ‘Beggar Your Neighbour’ in M O’Neill and S Orr (eds), ­Taxation: Philosophical Perspectives (New York, Oxford University Press, 2018) 124.

Independence and Accountability in the Charity Sector  21 and expressing the virtue of charity can generate harms and is undesirable to the extent that it does so. To the extent that manifesting altruistic virtues in the charity sector generates harms either to the recipients of charity or to charitable donors, this weakens the argument that we should value the sector insofar as it is a site for such virtues to flourish. However, for at least two reasons, objections that focus on harms associated with altruistic virtues should be treated with caution. First, such objections tend to focus on the virtue of charity and tend not to be raised in respect of other altruistic virtues that are commonly manifested in the charity sector, such as justice and public-spiritedness. Indeed, objections to the virtue of charity on account of harms associated with it are sometimes raised in the course of arguing that the charity sector would do better to operate by altruistic virtues other than charity. When presented in this way, objections to the virtue of charity are consistent with the proposition that there is value in an independent charity sector as a site for diversity in matters of virtue. Secondly, objections to altruistic virtues on the basis that they generate harms tend to proceed from a standpoint external to the virtues concerned. Thus, the proposition that the virtue of charity demeans the recipient of charity makes sense only in light of an ethic emphasising relational equality that is foreign to the virtue of charity and is instead aligned with the virtue of justice.26 To the extent that we care about diversity in matters of virtue, we should be wary of evaluating one virtue from the standpoint of another virtue in this way. Another sort of objection to the voluntary production of diverse goods via altruistic means proceeds from the thought that diversity and voluntarism in the charity sector generate waste and inefficiency. Again, this thought is present in Mill’s work; notwithstanding his appreciation of the value of sector diversity and voluntarism, he writes, in the course of arguing that poor relief should rest with the state, that ‘charity almost always does too much or too little; it lavishes its bounty in one place, and leaves people to starve in another’.27 Similarly, Attlee suggests that ‘[t]o avoid the dangers of charity good administration is necessary, and the co-operation of the various agencies, one with the other, in order to save waste and prevent imposture’.28 To some extent these concerns with waste and inefficiency might be addressed by the charity sector in ways that do not diminish diversity or voluntarism. For example, charities working in disaster relief might coordinate their response to a humanitarian crisis without compromising their distinctive 26 See Gardner, ‘The Virtue of Charity’ (2000) (n 19) 14–15 (‘the just and the charitable are set up to collide; to be more charitable is, you might say, partly a matter of being at odds with one’s more just friends’). 27 JS Mill, Principles of Political Economy with Chapters on Socialism, J Riley (ed) (Oxford, Oxford University Press, 1994) 356. 28 Attlee, The Social Worker (1920) (n 24) 55. See also the discussion of ‘philanthropic particularism’ in LM Salamon, ‘Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government-Nonprofit Relations in the Modern Welfare State’ (1987) 16 Nonprofit and Voluntary Sector Quarterly 29, 40–41.

22  Matthew Harding individual commitments and methods. However, after a point, co-ordination in the charity sector carries with it a risk that individual charities will change their commitments and methods to bring them into alignment with others – for example, by formal merger – and in such circumstances diversity and voluntarism may be compromised. To some extent, then, it may be appropriate from a liberal perspective to view waste and inefficiency as necessary costs of ensuring that diversity and voluntarism flourish in the charity sector. And consequently, to some extent it may be appropriate to resist state interference with the sector that aims to reduce waste and inefficiency.29

III.  Charity Accountability and Sector Independence from the State I now want to consider some different types of charity accountability to the state in light of the arguments from Part II about the value of an independent charity sector as a site for the voluntary production of plural goods and the manifestation of a diversity of altruistic virtues.30 First, I focus on what I call constitutive accountability; this is the accountability that is embedded in the fundamental state requirement that charities have purposes that satisfy the legal definition of charity, the public benefit test, and any other rules that bear on the question of whether purposes are charitable in law. Secondly, I consider what I call stakeholder accountability; this is the accountability that the state demands when it deals with charities as a stakeholder, for example via grant funding or through contracts by which funding is provided for the delivery of agreed outcomes. Finally, I explore what I call governance accountability; this is the accountability of charity managers and controllers in matters bearing on the application of charity assets to charitable purposes. The state pursues governance accountability through vehicles such as fiduciary law, company and other organisational law, and regulatory standards.

A.  Constitutive Accountability Earlier, I mentioned that charity law recognises a multiplicity of purpose types as charitable, and the number of such purpose types has grown substantially over the years. Nevertheless, the number of purpose types recognised as ­charitable 29 For example, consider state efforts to impose uniformity on universities in order to achieve various efficiencies; there are reasons to worry over such efforts in light of the value of diversity in the university sector. For a recent defence of the value of diverse universities, against a backdrop of ongoing stateimposed uniformity: G Davis, The Australian Idea of a University (Melbourne, Melbourne University Press, 2017). 30 In this chapter I use the term ‘accountability’ in a broad sense to refer to circumstances in which a person is required to give an explanation of her actions or plans that is then evaluated according to norms specified by some other person. Thanks to Rachel Leow for pressing me to be clear about this.

Independence and Accountability in the Charity Sector  23 in law is limited: traditionally, the limit was set with reference to the equity of the preamble to the Statute of Elizabeth;31 more recently in jurisdictions such as England and Wales it has been set by analogy to extant charitable purposes.32 Moreover, c­ haritable purposes must be of public benefit,33 and they may not fall foul of disqualifying rules such as the rule against political purposes that ­continues to operate in several jurisdictions.34 In all these ways, the state makes charities accountable. Organisations are, of course, free to pursue whatever purposes they choose, provided that the purposes in question are not illegal or contrary to public policy in ways of concern to bodies of law such as the law of contract. However, organisations that seek to be constituted as legally recognised charities do not enjoy this freedom; their purposes must be approved by the state via the doctrines of charity law. Hence constitutive accountability. The extent and intensity of constitutive accountability varies from time to time and from jurisdiction to jurisdiction. In England and Wales, there is at the present time a relatively high level of scrutiny of the purposes of charities in relation to questions of public benefit: this was occasioned by legislative reforms introduced in 2006 that purported to abolish a ‘presumption’ of public benefit that was thought to exist in English law prior to that time.35 In contrast, in Australia a ‘presumption’ of public benefit is statutorily mandated in a wide range of cases and to this extent constitutive accountability is less intense in that jurisdiction than it is in England and Wales.36 In jurisdictions such as England and Wales and Canada where a rule against political purposes currently operates, charities with such purposes are accountable to the state to the extent that they must prove that those purposes are ancillary or incidental to overarching charitable purposes or may be correctly characterised as something other than political.37 In Australia, where the rule against political purposes has been repealed, a more accommodating approach is taken.38 In New Zealand, although the rule against political

31 See Morice v Bishop of Durham (1804) 9 Ves Jun 399 (Sir William Grant MR); (1805) 10 Ves Jun 522 (Lord Eldon), and note Joshua Getzler, ‘Morice v Bishop of Durham (1805)’ in C Mitchell and P Mitchell (eds), Landmark Cases in Equity (Oxford, Hart Publishing, 2012) 157, 160, describing Morice as imposing a sort of ‘numerus clausus’ on charitable purposes. The implications of the ruling in Morice were evident in the Australian case of Royal National Agricultural and Industrial Association v Chester [1974] 48 ALJR 304. 32 Charities Act 2011 (England and Wales), s 3(1)(m). See also Charities Act 2013 (Australia), s 12(1)(k). 33 Charities Act 2011 (England and Wales), ss 2(1)(b) and 4. See also Charities Act 2013 (Australia), ss 5(b)(i) and 6. 34 See Bowman v Secular Society [1917] AC 406, 442 (Lord Parker). 35 See Charities Act 2011 (England and Wales) s 4(2). The prevailing view in England and Wales is now that there never was a ‘presumption’ of public benefit in charity law before 2006 and that s 4(2) addresses a non-problem: see R (Independent Schools Council) v Charity Commission for England and Wales [2012] 2 WLR 100 (UT) [54]–[71]. 36 Charities Act 2013 (Australia), s 7. 37 See, eg, Human Dignity Trust v Charity Commission for England and Wales [2014] FTT (Charity) CA/2013/0013. 38 Aid/Watch Incorporated v Federal Commissioner of Taxation (2010) 241 CLR 539 (High Court of Australia) and Charities Act 2013 (Australia), s 11, 12(1)(l) and (2).

24  Matthew Harding purposes appears to have been repealed,39 constitutive accountability for charities with political purposes continues to be relatively intense because of the way the public benefit test is applied to such charities under current New Zealand law. Political charities must prove to the satisfaction of the state that the political ends they seek will benefit the public, and in areas of political controversy or complexity this is almost impossible to do.40 Occasionally, judges in charity law cases adopt an approach to constitutive accountability that seeks to be more accommodating of charities than is the norm in charity law. For example, in Incorporated Council of Law Reporting for England and Wales v Attorney-General, Russell LJ did not attempt to determine whether the purpose before him – the purpose of producing and disseminating law reports – was within an established ‘head’ of charity. Instead, he found that the purpose was charitable because it stood to generate public benefit and there was no particular reason to think that it was beyond the spirit and intendment of the Elizabethan preamble.41 A similar approach has been taken in certain cases in New Zealand, although it does not represent the current law in that jurisdiction.42 In relation to the public benefit test, there have been occasional judicial statements to the effect that the question whether a purpose is of public benefit is to be decided by deferring to the views of those whose purpose it is,43 but that approach has been roundly rejected in leading decisions of the House of Lords.44 Perhaps the most striking judicial suggestion that constitutive accountability should be relaxed in relation to the public benefit test comes from the charity law of the US, in a celebrated case that arose against the background of federal tax law. In Bob Jones University v United States, a majority of the United States Supreme Court ruled that a university with racially discriminatory policies could not demonstrate the requisite public benefit to warrant tax exemption as a ­charity.45 In a concurring opinion, Powell J expressed unease with the operation of the public benefit test in this setting, arguing that the test assumes that the proper function of charities is to ‘act on behalf of the Government in carrying out governmentally approved ­policies’.46 In expressing this unease, Justice Powell explicitly referred 39 In re Greenpeace of New Zealand Incorporated [2015] 1 NZLR 169 (Supreme Court of New Zealand). 40 See In re Family First New Zealand [2018] NZHC 2273 (Simon France J). 41 Incorporated Council of Law Reporting for England and Wales v Attorney-General [1972] Ch 73, 88–89. See also Sachs LJ at 94. 42 See Commissioner of Inland Revenue v Medical Council of New Zealand [1997] 2 NZLR 297 (New  Zealand Court of Appeal); Latimer v Commissioner of Inland Revenue [2002] 3 NZLR 195 (New Zealand Court of Appeal); Re Greenpeace of New Zealand Inc [2013] 1 NZLR 339 (New Zealand Court of Appeal), but see now In re Greenpeace of New Zealand Incorporated [2015] 1 NZLR 169 (New Zealand Supreme Court). 43 In re Foveaux [1895] 2 Ch 501 (Chitty J); O’Hanlon v Logue [1906] 1 IR 247 (Irish Court of Appeal); Nelan v Downes (1917) 23 CLR 546 (High Court of Australia). 44 National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31; Gilmour v Coats [1949] AC 426. See also Re Hummeltenberg, Beatty v London Spiritualistic Alliance [1923] 1 Ch 237, 242 (Russell J). 45 Bob Jones University v US 461 US 574 (1983). 46 Ibid, 609.

Independence and Accountability in the Charity Sector  25 to the value of a charity sector independent from the state as a site for diversity, and he stated that ‘[f]ar from representing an effort to reinforce any perceived “common community conscience”, the provision of tax exemptions to non-profit groups is one indispensable means of limiting the influence of government ­orthodoxy on important areas of community life’.47 Justice Powell’s opinion in the Bob Jones case provokes reflection on the question whether the extent and intensity of constitutive accountability in contemporary charity law is appropriate, given the value of the charity sector as a site for the voluntary production of plural goods and the manifestation of a diversity of ­altruistic virtues. Should charity law recognise a wider range of purpose types than it currently does? Should it recognise all public benefit purposes as charitable? Or even, as Powell J suggested in Bob Jones, all not-for-profit purposes that do not offend fundamental public policy? Some considerations suggest that a more accommodating approach is not necessary to protect and preserve diversity and voluntarism in the charity sector. Even if some purpose types are not recognised as charitable in law, a large range of others are, and in any event people who wish to associate for purposes that are not recognised as charitable are free to do so using vehicles other than legally recognised charities. Moreover, voluntarism thrives in the for-profit sector, and plural goods continue to be produced in all sectors, irrespective of the extent and intensity of constitutive accountability that the state demands in the charity sector. Indeed, to some extent constitutive accountability might even serve the value of diversity in the charity sector, by ensuring that ­charities are structurally oriented to altruism and thereby creating conditions under which a multiplicity of altruistic virtues can be manifested.48 That said, on occasion individual state efforts to augment constitutive accountability might be questioned in light of the value of diversity and voluntarism in the charity sector. For example, consider the law reforms enacted in England and Wales in 2006, by which the public benefit test of English charity law was rendered more rigorous. Whereas before that time it had been thought that the public benefit of charities formed for the advancement of education and the advancement of religion could be assumed unless the contrary was shown, after the 2006 reforms it was thought necessary for charities to prove such public benefit with evidence. The Charity Commission for England and Wales formed the view that in the case of fee-charging schools, proving public benefit included demonstrating that those who could not afford to pay fees could nonetheless access such schools to some sufficient degree. The Upper Tribunal was asked to determine whether the Charity Commission had correctly interpreted the new law, and although it found that there were some errors in the Commission’s interpretation, it also ruled that a feecharging charity that excludes the poor does not satisfy the public benefit test.49 47 Ibid. 48 I elaborate on this point in Harding, Charity Law and the Liberal State (2014) (n 8) 88–102. 49 R (Independent Schools Council) v Charity Commission for England and Wales [2012] 2 WLR 100 [178].

26  Matthew Harding In the wake of the legislative reforms of 2006 and the decision of the Upper Tribunal in the Independent Schools case, the trustees of fee-charging schools in England and Wales have compelling reasons to worry about questions of inclusion and access that they did not previously have. This is not to say that such trustees did not take an interest in questions of inclusion and access before 2006; indeed, as the Upper Tribunal indicated in the Independent Schools case, for a long time most fee-charging schools in England and Wales have either provided means-tested bursaries or made their facilities available to the community, or both. It is, rather, to say that the legislative reforms of 2006 and the decision in the I­ndependent Schools case render questions of inclusion and access pervasive and pressing in a new way: those questions are now explicitly tied to constitutive accountability via the public benefit test. It seems plausible to suggest that school trustees will respond to these new circumstances by dedicating more time and effort to t­hinking about inclusion and access than was previously the case, and the empirical data that have been gathered to date on this point seem to support this suggestion.50 Given the limited resources that school trustees have to dedicate to strategic and operational matters, it also seems plausible to suggest that any increased time and effort devoted to inclusion and access will be at the expense of time and effort devoted to other goals and concerns. If the description I have just offered is broadly accurate, then there are reasons to think that the legislative reforms of 2006 and the decision in the Independent Schools case stand to diminish diversity in the charity sector in England and Wales in a way that should be of concern. The key is in seeing that questions of inclusion and access call for the manifestation of a particular altruistic virtue, the virtue of justice. As John Gardner argues, this is the virtue that is distinctively concerned with matters of allocation as between potential claimants, especially in circumstances of scarcity.51 The virtue of justice demands a mindset that is attuned to the relative positions of differently situated people and that carefully weighs those relative positions in deciding on allocations between them. It stands in contrast to other altruistic virtues, such as charity and public-spiritedness, that are not interested in matters of allocation and (at least in the case of charity) have a more spontaneous, artless profile. If the legislative reforms of 2006 and the decision in the Independent Schools case demand the devotion of increased time and effort to questions of inclusion and access, and if such questions call for the manifestation of the virtue of justice, then arguably the 2006 reforms and the Upper Tribunal’s

50 G Morgan et al, ‘The Public Benefit Requirement for Charities in England and Wales: A Qualitative Study’ (2012) 15 Charity Law and Practice Review 107. 51 Gardner, ‘The Virtue of Justice’ (2012) (n 19). See also David Hume, An Enquiry Concerning the Principles of Morals, London, 1751, Eighteenth Century Collections Online, Gale, accessed 16 January 2019, 34 (emphasising the connection between scarcity and the ‘cautious, jealous virtue’ of justice); J Rawls, A Theory of Justice, revd edn (Oxford, Oxford University Press, 1999) 6 (‘the distinctive role of conceptions of justice is to specify basic rights and duties and to determine the appropriate distributive shares’); Sandel, Liberalism and the Limits of Justice (1998) (n 22).

Independence and Accountability in the Charity Sector  27 decision stand to diminish diversity in the altruistic virtues manifested by the ­trustees of fee-charging schools in England and Wales. Where such trustees might once have had scope to manifest visionary public-spiritedness, for example, they might now be compelled to be scrupulously just instead.52 It has been argued that the legislative reforms of 2006 were designed to place pressure on fee-charging schools to take steps to improve the distribution of educational opportunity in England and Wales.53 If this was the objective, then arguably the reforms have to some extent succeeded. But, for the reasons I have just offered, this success may have come at a cost to diversity in the charity sector in England and Wales. To that extent, constitutive accountability in England and Wales, as reflected in the current application of the public benefit test to fee-charging charities, may entail excessive government interference with the independence of the charity sector. It is worth remembering that for the government seeking to improve the distribution of educational opportunity, there may be options available other than placing the burden of this task on the charity sector. Most obviously, the government could itself undertake the task, for example by increasing funding for state schools and for programmes to ensure that children from disadvantaged backgrounds are supported in their school studies. The cost to diversity associated with asking the charity sector to focus on inclusion and access as a matter of constitutive accountability grounds a reason for taking seriously such other options.

B.  Stakeholder Accountability The state is often a stakeholder in a charity, whether because it provides grant funding to the charity or because it is a party to a contract with the charity under which it provides funding in exchange for the delivery of agreed outcomes.54 In all such cases, charities are accountable to the state in one way or another, for ­example through grant acquittal processes or by reporting against stipulated targets or outcomes. The ‘new public management’ that has characterised public sector administration since the 1980s has led to a profound augmentation of stakeholder 52 For example, consider a specialist school providing high-level training for musically gifted ­children. Where the trustees of such a school spend their time worrying about questions of access and inclusion, they may neglect a range of other questions relating to how best to develop the musically gifted children whose potential contribution to culture is a large part of the public benefit argument for the school. The case of the specialist music school is discussed by the Upper Tribunal in R (Independent Schools Council) v Charity Commission for England and Wales [2012] 2 WLR 100 [258]. 53 A Dunn, ‘Using the Wrong Policy Tools: Education, Charity, and Public Benefit’ (2012) 39 Journal of Law and Society 491. 54 For example, in Australia in 2016, the state was the source of 43% of the revenue of the charity sector: A Powell et al, Australian Charities Report 2016 (2017) 53. It might also be argued that the state is a stakeholder in the charity sector insofar as it provides tax exemptions to charities. However, this argument depends on contestable assumptions about the tax treatment of charities and for this reason I do not discuss tax exemptions in what follows.

28  Matthew Harding accountability as governments have divested themselves of the responsibility for directly providing a range of social welfare services and sought to fund the ­charity sector to provide the services instead. In particular, governments have used contractual methods to control and monitor the goods that charities produce and the means adopted in producing them. The advent of this ‘contract culture’ has generated considerable academic attention, much of which has considered the implications of the changes for the independence of the charity sector; as Debra Morris writes in her leading treatment of the changes, ‘this new climate is giving rise to a fundamental shift in the values and culture of the charity sector as a whole’.55 Are such changes cause for liberal concern in light of the arguments presented in Part II? Stakeholder accountability, especially in the setting of funding agreements between charities and the state, does raise concerns in light of the value of an independent charity sector. Government funding is often tied to the provision of goods that accord with government policies and priorities. To the extent that charities agree to provide such goods in exchange for the funding on offer, ­charities are corralled into focusing their energies and efforts on the production of only some of the wide range of goods that they might otherwise have sought to produce. In particular, there is a risk that counter-majoritarian goods that would not ordinarily be provided by the state or the for-profit sector will not be provided by the charity sector either in circumstances where the charity sector’s priorities are chiefly shaped by government funding opportunities. Such a state of affairs would entail a diminution in the production of plural goods in society. Moreover, the voluntarism that characterises the charitable sector might be weakened where charities are so dependent on government funding for survival that they have no practical choice but to do the state’s bidding in matters of strategy and operations. As a conceptual matter, it might be true that a voluntarily formed charity retains its voluntary character even when it is entirely dependent on government funding; after all, those who manage and control that charity are always legally free to extricate the charity from government ties.56 However, as a practical matter it is

55 D Morris, ‘Paying the Piper: The “Contract Culture” as Dependency Culture for Charities?’ in A Dunn (ed), The Voluntary Sector, the State and the Law (Oxford, Hart Publishing, 2000) 123, 123. Other academic work on the ‘contract culture’ includes J Warburton and D Morris, ‘Charities and the Contract Culture’ [1991] The Conveyancer 419; J Lewis, ‘Reviewing the Relationship between the Voluntary Sector and the State in Britain in the 1990s’ (1999) 10 Voluntas 255; J Garton, ‘Charities and the State’ (2000) 14 Trust Law International 93; N Brooks, ‘The Role of the Voluntary Sector in a Modern Welfare State’ in B Chapman and D Stewart (eds), Between State and Market: Essays on ­Charities Law and Policy in Canada (Montreal, McGill-Queens’ University Press, 2001) 166; N Seddon, Who Cares? How State Funding and Political Activism Change Charity (Civitas, Institute for the Study of Civil Society, 2007); A Dunn, ‘Demanding Service or Servicing Demand? Charities, Regulation and the Policy Process’ (2008) 71 Modern Law Review 247; K Chan, ‘The Co-Optation of Charities by Threatened Welfare States’ (2015) 40 Queen’s Law Journal 561. 56 On the conceptual side, see Central Bayside General Practice Association Limited v Commissioner of State Revenue (2006) 228 CLR 168 (High Court of Australia).

Independence and Accountability in the Charity Sector  29 difficult to argue that such a charity operates on a voluntary basis to the extent that eschewing government funding would render the charity unviable.57 A further argument might be raised to the effect that stakeholder accountability tends to restrict the available means by which charities carry out their purposes. Where government seeks to control and monitor the processes by which charities produce state-funded goods, as is often the case in funding agreements, those processes may be pushed into alignment with the processes that typically characterise the government’s own production of various goods. In other words, government might place pressure on the charity sector to adopt new and foreign approaches to its work. In her essay on ‘contract culture’, Morris refers to some examples: a situation in which the Salvation Army was required by a government funding agreement to restrict out-of-hours access to its services; and a government stipulation that a playgroup open for longer hours, requiring the employment of full-time staff, even though the playgroup had been set up in part to provide part-time employment to local women.58 Another example, familiar in different jurisdictions, might be the explicit or implicit expectation that a charity receiving government funding will not engage in political advocacy in a way that embarrasses the government.59 Earlier, I argued that one key to understanding the importance of an independent charity sector in a liberal society is in seeing that the sector is a site for the manifestation of a diversity of altruistic virtues, ranging from charity (in the non-legal sense), to justice, to public-spiritedness, to mercy. Where stakeholder accountability entails the state interfering with the means by which charities produce various goods, there is a risk that the opportunity for individuals within the charity sector to cultivate and express certain altruistic virtues might be diminished. In some cases, this might be because the demands of stakeholder accountability cause the managers and controllers of charities to turn away from altruism altogether in favour of more bureaucratic virtues such as fidelity to a contractual mandate or conscientiousness in the discharge of duties to the state. Arguably, such a risk attends the implementation of bureaucratic demands such as those placed on the Salvation Army and the playgroup in Morris’s examples. In more benign cases, the demands of stakeholder accountability might cause charities to downplay certain altruistic virtues not typically associated with the activities

57 At the same time, where the state offers funding to charities to deliver certain goods but the ­charities eschew that funding so as to retain their independence, there is a real risk that no-one will produce the goods in question. In this world, charities may preserve their independence but at an intolerable cost. 58 Morris, ‘Paying the Piper’ (n 55) 132–133. See also J Lewis, ‘Voluntary Organizations in “New ­Partnership” with Local Authorities: The Anatomy of a Contract’ (1994) 28 Social Policy and Administration 206, cited in Morris at 132. 59 In Australia, explicit restrictions on political advocacy are not permitted in Commonwealth government funding agreements: Not-for-Profit Sector Freedom to Advocate Act 2013 (Cth).

30  Matthew Harding of the state, such as charity or mercy, and emphasise others more commonly associated with state activities, such as justice or public-spiritedness. If stakeholder accountability generates costs to voluntarism and diversity, then it is worth at least pausing to consider whether there are plausible and effective ways to produce plural goods in society that do not entail those costs. Bear in mind that the ‘new public management’ approach to the relationship of the charity sector and the state was first introduced in the 1980s and represents just one model for the production of plural goods in society. According to another model – one with a venerable pedigree – the state itself takes direct responsibility for the provision of certain goods and leaves the charity sector to provide a range of other goods without state funding and to that extent free from the demands of stakeholder accountability. There are traces of this thinking in Mill, in parts of his work where he argues for the state provision of poor relief and basic education but also argues that the charity sector might supplement that basic provision ‘according to its own judgment’.60 And the idea that there should be a division of labour between the state and the charity sector, according to which the state provides goods associated with social justice and the charity sector supports human flourishing in other diverse ways, is prominent in the writings of William Beveridge, who was both a pioneer of the welfare state and also a liberal champion of diversity and ­voluntarism in the charity sector.61 There is a rich philosophical literature discussing the various reasons why the state should directly take on the production of certain goods, in particular goods necessary to the achievement of conditions of social justice. This literature tends to focus on the state’s unique position as the holder of a monopoly on legitimate coercive power, its unparalleled scale and resources, and its capacity to provoke and coordinate human behaviour in a way that does not interfere questionably with people’s moral sentiments. Philosophers tend not to focus on the benefits to the charity sector itself that might flow from the state relieving that sector of the burden of producing certain goods. Reflection on stakeholder accountability, and the costs to diversity and voluntarism that are associated with it, suggest that such benefits ground another strand of argument from a liberal standpoint for thinking that direct state provision is to be preferred at least some of the time. This strand of argument takes its place, alongside other arguments focused more on the unique position of the state itself, in bolstering the overall case for maintaining an appropriate division of labour between the charity sector and the state in a liberal society.62

60 See especially Mill, Principles of Political Economy (1994) (n 27) 353–357. The quotation in the text is at 357. 61 See W Beveridge, Social Insurance and Allied Services (London, HMSO, 1942); W Beveridge, Voluntary Action: A Report on Methods of Social Advance (London, Allen and Unwin, 1948). 62 Dan Halliday and I explore the ideas presented in this paragraph in more detail in ‘Keeping Justice (Largely) Out of Charity: Pluralism and the Division of Labour between Charitable Organisations and the State’, unpublished paper on file with the author.

Independence and Accountability in the Charity Sector  31

C.  Governance Accountability Perhaps the most familiar form of charity accountability to the state is governance accountability. The idea that underpins this type of accountability is that assets dedicated to charitable purposes must be faithfully and well deployed only for those purposes, and not hoarded, wasted or diverted into the pockets of charity managers or controllers or related parties. Numerous legal rules give expression to governance accountability, from rules setting out the fiduciary duties imposed by equity on charity trustees and others occupying fiduciary roles and positions in the charity sector,63 to the rules of company and other organisational law that bind the directors and other officers of charitable organisations, to statutory rules articulating regulatory standards that must be met by the managers or controllers of a charity if it is to continue to be registered.64 In some respects the demands of governance accountability are startling; for example, the rigour of equity’s rules against fiduciary conflicts of interest and unauthorised profits is well-known and much-discussed.65 Moreover, in recent times certain state efforts to maintain or bolster instances of governance accountability have proven highly controversial; for example, in 2018 in Canada without Poverty v Attorney-General of Canada, the Canada Revenue Agency’s effort to limit the amount of money spent annually by any given charity on political advocacy was declared unconstitutional.66 It is therefore worth asking whether governance accountability is at odds with diversity and voluntarism in the charity sector, such that it represents excessive state ­interference in that sector. Governance accountability seems most susceptible to objections grounded in the value of voluntarism in the charity sector. To the extent that the state stipulates how charities must operate, it is arguable that the scope for voluntary action within the sector is reduced. Charity managers and controllers are not free to decide for themselves how best to deploy charity assets; they must instead follow the directions of the state. When thinking about the extent to which governance accountability interferes with voluntarism in a way that should be of liberal concern, it helps to distinguish between cases in which governance accountability serves the fundamental objective of ensuring that charity assets are applied only to charitable purposes, and cases in which governance accountability assumes that charity assets are being applied only to charitable purposes and seeks to control the ways in which those assets are applied to those purposes. Cases of the first type might be where equity compels an errant charity trustee to account for ­misapplied 63 For an excellent scholarly treatment of such rules, see PB Miller and AS Gold, ‘Fiduciary ­Governance’ (2015) 57 William and Mary Law Review 513. 64 See, eg, the ‘governance standards’ and the ‘external conduct standards’ in Divisions 45 and 50 of the Australian Charities and Not-for-Profits Commission Regulation 2013 (Cth). 65 For a sense of the rigour of the rules, see the celebrated case of Boardman v Phipps [1967] 2 AC 46 (HL). 66 Canada without Poverty v Attorney-General of Canada [2018] ONSC 4147 (Ontario Superior Court of Justice).

32  Matthew Harding trust funds or to refrain from decision-making in circumstances of conflict of interest and duty. In contrast, cases of the second type might be where a legislator stipulates that charities may accumulate only a certain percentage of their income in any given year or that charity tax exemptions are conditional on c­harities carrying out their purposes within a certain territorial jurisdiction,67 or where a regulator demands that a charity running a business in support of its charitable purpose demonstrate that the business is capable of making a profit.68 In cases where the aim of governance accountability is to ensure that ­charity assets are applied only to charitable purposes, it seems readily arguable that governance accountability is compatible with voluntarism in the charity sector. To the extent that charity assets have been voluntarily dedicated to charitable purposes – for example by the settlors of trusts, the members of charitable companies or associations, or donors – ensuring that the managers and controllers of those assets faithfully deploy them only for those purposes is consistent with a high degree of concern for the voluntary choices of the settlors, members and donors in question.69 Moreover, it is arguable that subjecting charity managers and controllers to norms demanding that they apply charity assets only to c­ haritable purposes is consistent with the freedom of action of those charity managers and controllers themselves. After all, charity managers and controllers voluntarily undertake the various roles and functions that entail the application of charity assets only to charitable purposes. So while charity managers and controllers do not necessarily voluntarily undertake to abide by specific norms of governance accountability demanding the application of charity assets in this way,70 it seems strange to suggest that applying such norms to them is somehow inconsistent with what they have voluntarily undertaken to do. Rather, the imposition of the norms on them seems to reflect and reinforce their voluntary undertaking. Indeed, this thinking might be taken further: it is arguable that imposing norms demanding the application of charity assets only to charitable purposes on those who have voluntarily undertaken roles and functions in the charity sector actually advances voluntarism in relation to the roles and functions in question. By articulating and enforcing such norms of governance accountability, the state 67 Note also the trend, particularly pronounced in the developing world, towards restricting the activities of charities that receive foreign funding: A Buyse, ‘Squeezing Civic Space: Restrictions on Civil Society Organizations and the Linkages with Human Rights’ (2018) 22 The International Journal of Human Rights 966. 68 See Charities Services New Zealand, Case Report – International Centre for Entrepreneurship Foundation (CC27546) 24 October 2017, available at www.charities.govt.nz/assets/Uploads/IcehouseReview-final2.pdf. I am grateful to Sue Barker for this reference. 69 It is a matter of debate whether the state invariably demonstrates this high degree of concern for the voluntary choices of settlors: see, eg, the analysis of cy-près jurisprudence in J Picton, ‘Donor Intention and Dialectic Legal Policy Frames’ in M Harding (ed), Research Handbook on Not-for-Profit Law (Cheltenham, Edward Elgar, 2018) 189. 70 See further M Harding, ‘Fiduciary Undertakings’ in PB Miller and AS Gold (eds), Contract, Status, and Fiduciary Law (Oxford, Oxford University Press, 2016) 71, 77–79, but note the contrary view in J  Edelman, ‘When Do Fiduciary Duties Arise?’ (2010) 126 Law Quarterly Review 302; J Edelman, ‘The Importance of the Fiduciary Undertaking’ (2013) 7 Journal of Equity 128.

Independence and Accountability in the Charity Sector  33 may signal ex ante to those who perform particular roles and functions what is entailed in the due performance of those roles and functions. In this way, the state may contribute to the work of defining roles and functions and deepening understanding in relation to them.71 And all else being equal, the value of voluntarism suggests that the choice to undertake a well-defined and understood role or function is to be preferred to the choice to undertake a role or function that is ill-defined and poorly-understood.72 Thus, for example, the charity trustee who voluntarily undertakes the role of trustee with an understanding of equity’s strict rules about fiduciary responsibility and the accountability of trustees may be said to choose that role in a richer sense than the charity trustee who voluntarily undertakes trusteeship but does not understand its meaning. Norms of governance accountability demanding that charity managers and controllers apply charity assets only to charitable purposes therefore seem consistent with voluntarism in the charity sector, and in some respects may even promote voluntarism in that sector. To that extent, such norms might be said to sit well with sector independence. Matters are more complicated in relation to norms of governance accountability that assume that charity assets are being applied to charitable purposes but seek to control the ways in which they are so applied. Such rules tend to be animated by public policy goals external to the commitment of charity managers and controllers to apply charity assets only to charitable purposes. For example, a rule restricting the amount of charity income that may be accumulated in any given year seeks not to ensure that charity assets are duly applied, but rather to strike the right balance in that application between the demands of present and future generations.73 Similarly, a rule restricting the pursuit of charitable purposes to a territorial jurisdiction aims to ensure that charitable purposes benefit a certain population group over others. And in Canada without Poverty, EM Morgan J of the Ontario Superior Court of Justice stated that the objective behind a rule ­limiting charity expenditure on political advocacy was straightforwardly to restrict the political speech of charities.74 Whether norms of governance accountability driven by external public policy goals present a threat to voluntarism in the charity sector depends on the extent 71 I expand on this point with reference to fiduciary roles and functions in M Harding, ‘­Disgorgement of Profit and Fiduciary Loyalty’ in S Degeling and J Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, 2016) 19; Harding, ‘Fiduciary Undertakings’ (n 70) (2016) 84–88; M Harding, ‘Fiduciary Law and Social Norms’ in EJ Criddle, PB Miller, and RH Sitkoff, (eds), The Oxford Handbook of Fiduciary Law (Oxford, Oxford University Press, 2019) 797. 72 In his leading account of the conditions of autonomy, J Raz emphasises the importance of a satisfactory range of individuated and distinctive options from which to choose: J Raz, The Morality of Freedom (Oxford, Clarendon Press, 1986) chs 14 and 15. On a Razian view, voluntary choice depends in important ways on clear definition and understanding of roles and functions in society. 73 On this public policy goal as it applies in the law of charity accumulations, see I Murray, ‘­Accumulation in Charitable Trusts: Australian Statutory Perpetuities Rules’ (2014) 8 Journal of Equity 163; ‘Accumulation in Charitable Trusts: Australian Common Law Perpetuities Rules’ (2015) 9 Journal of Equity 30. 74 Canada without Poverty v Attorney-General of Canada [2018] ONSC 4147 (Ontario Superior Court of Justice) [59].

34  Matthew Harding to which those norms are known and understood ex ante by different actors in the sector. To illustrate, consider a rule requiring a minimum annual distribution of the income of a charitable trust. Where a settlor knows and understands that charity trustees must make minimum annual distributions of trust income, then that settlor’s voluntary choice to place charity assets in the hands of charity trustees may be said to be a voluntary choice for those assets to be administered in accordance with that norm. On the other hand, where a settlor does not know of the norm, and gives charity trustees a mandate to exercise their discretion when deciding how best to distribute trust income, then governance accountability driven by external public policy goals arguably thwarts the settlor’s voluntary choice. Similarly, if a charity trustee voluntarily undertakes that role knowing that she must make a minimum annual distribution of trust income, then the existence of the rule imposing that requirement is consistent with the trustee’s voluntary undertaking. However, if the trustee knows nothing of the rule, matters are more complicated. The trustee may faithfully perform her voluntary undertaking to apply charity assets only to charitable purposes and still fall foul of the rule. In these circumstances it is difficult to conclude that the rule is consistent with the trustee’s voluntary undertaking in the way that is true of rules reflecting and ­reinforcing that undertaking. The lesson to be drawn from these examples is that the more remote the logic of governance accountability is from the voluntary undertaking of charity managers and controllers to apply charity assets only to charitable purposes, the greater the risk that governance accountability might stand at odds with voluntarism in the charity sector. This is not to say that the state should refrain from imposing, on charity managers and controllers, governance accountability driven by external public policy goals; the public policy goals may be of such weight that such an imposition is justified, all things considered. It is, rather, a reminder that governance accountability in furtherance of external public policy goals is potentially inconsistent with voluntarism in the charity sector and this potential i­ nconsistency should be brought into view whenever the question whether to implement or augment such governance accountability is being considered. Before concluding, it is worth noting one situation in which governance accountability comes into clear conflict with voluntarism in the charity sector: where charity managers or controllers seek to bring an end to their commitment to apply charity assets only to charitable purposes. Of course, charity managers and controllers are free to do just this by resigning from their roles or functions in the charity sector, and such a strategy is entirely consistent with the principle of ­voluntary action that animates the sector.75 But what about where charity managers or controllers seek to convert the charitable structure in which they perform

75 Although note that resignation may not in all circumstances extinguish applicable norms of governance accountability, especially the norms of fiduciary law: see Canadian Aero Service Ltd v O’Malley [1974] SCR 592 (Supreme Court of Canada).

Independence and Accountability in the Charity Sector  35 their role or function into some new structure in which they are no longer required to apply charitable assets to charitable purposes? In particular, what is to be done in cases where charity managers or controllers seek to restructure so they can take the benefit of charity assets for themselves?76 Norms of governance accountability preclude such courses of action: charity managers or controllers who take steps to restructure in order to exit the charity sector are in breach of fiduciary duty. M ­ oreover, recent English case law has confirmed that the applicable fiduciary norms bind not only trustees, directors and others who manage c­ harities from day to day, but also the members of charity companies and associations who might wish to exercise their legal powers in general meeting to benefit themselves or restructure in pursuit of other objectives.77 Governance accountability thus entails the relatively unusual phenomenon of the state imposing significant restrictions on people’s freedom of exit from chosen social and economic structures. All of this comes at a cost to voluntarism in the charity sector, especially where it prevents the members of charity companies and associations, who might have founded and financed a charity from the outset, from restructuring according to their own lights. To the extent that governance accountability entails this cost, it is a ­phenomenon that demands robust justification from a liberal point of view. The defence that is usually offered is grounded in the powerful public interest in ­ensuring that assets dedicated to charity are not subsequently lost to private ownership.78

IV. Conclusion Independence and accountability in the charity sector are frequently discussed, but such discussions often assume much that demands further exploration. In this chapter, I have sought to highlight some of what is often assumed. I have provided some arguments for why we might want the charity sector to be independent of the state, arguments grounded in core liberal values of diversity and voluntarism. These arguments emphasise that those values depend not only on the plural goods produced by the charity sector, but also on the diverse means by which those plural goods are produced and in particular on the diversity of altruistic virtues that are expressed in the sector. I have explored three types of charity accountability to

76 On one view, this was what triggered the long-running legal dispute in Australia over the assets of the former Bread Research Institute: see further Grain Technology Australia Limited v Rosewood Research Pty Ltd [2019] NSWSC 1111. 77 Lehtimaki v The Children’s Investment Fund Foundation (UK) [2018] EWCA 1605 (CA). See also the Restatement of Charitable Nonprofit Organizations (American Law Institute, Tentative Draft no 1, 2016), §2.01 comment c, discussed in LH Mayer, ‘Fiduciary Principles in Charities and Other ­Nonprofits’ in EJ Criddle, PB Miller, and RH Sitkoff, (eds), The Oxford Handbook of Fiduciary Law (Oxford, Oxford University Press, 2019) 103. 78 See, eg, Mayer (2019) (n 77).

36  Matthew Harding the state – constitutive accountability, stakeholder accountability, and governance accountability – considering the extent to which those types of accountability should be of liberal concern in light of sector diversity and voluntarism. I hope to have shown that in many ways charity accountability is consistent with, and in some cases may even promote, diversity and voluntarism in the charity sector. However, my intention is also to sound a warning: charity accountability can diminish and undermine sector diversity and voluntarism. Where it does, and it cannot be defended in a way that justifies the cost to liberal values associated with it, then it should be wound back or eliminated accordingly.

3 Debating the Extent of Party/State Control Over Overseas Nonprofit Organisations: Charity Law Debates in China MARK SIDEL

I.  Introduction: Fault Lines in Chinese Charity Law Charity law debates and the fault lines over charity law look different in authoritarian systems, even authoritarian states with active charitable sectors. Authoritarian states are anxious about civil society, and so they tend to limit the types of charitable and nonprofit sectors that will be allowed, what they can do, how they can raise funds, and whether they can engage in advocacy. Advocacy – for public policy causes, for law reform and justice, for the environment, for women’s rights – makes authoritarian systems anxious too, and restrictions on charities and voluntary organisations reflect that anxiety and caution. This chapter seeks to illustrate the terms and boundaries and processes of ­charity law debates in authoritarian states by looking at the fault lines and an important charity law debate in China, a country where state-society relations are quite controlling. There are of course limits to such an analysis – debates on other issues might look different; debates in other one-party states (such as Vietnam or Cuba) might look different. But one important case in one very important country is better than none, and perhaps some useful comparisons with charity law debates in the more democratic world can be drawn. Even in authoritarian states, there are many charity law debates, because in virtually every authoritarian or one-party country (except North Korea) the party/state knows that it needs a voluntary sector. In China, that understanding began to grow in the 1980s. Today, China has one of the most rapidly growing voluntary sectors anywhere in the world, regulated closely by an anxious state. And yet the state wants a voluntary sector – to take on services that the state seeks to move away from providing; to raise funds for services and buildings and other projects; to experiment with new forms of social services; to take government funding, with

38  Mark Sidel conditions, to serve China’s people.1 China is not North Korea: China decided long ago to permit a voluntary sector to grow, albeit with significant controls. That fundamental conflict between the need for control and the need for some form of voluntary sector undergirds charity law debates in China. Those debates take place in various regulatory fora, both on the regulation of ­domestic ­organisations and the regulation of foreign nonprofit organisations in China. This chapter looks at one such fault line, a debate about the regulatory treatment of overseas nongovernmental organisations, foundations, think tanks and other nonprofits in China. Today, China’s framework for monitoring and control of overseas NGOs, ­foundations, and other foreign nonprofit groups in China is increasingly restrictive, and yet enables the Chinese state to permit the groups China wants to remain in the country to have a legalised status.2

II.  Delineating the Fault Lines: China’s Relationships with Overseas NGOs, Foundations and Think Tanks Although it’s tempting to focus on immediate issues in working in China, China’s relationships with foreign NGOs, foundations and other nonprofits have a long history that help to delineate differences in perspective on how to regulate these foreign groups. In China, the long history of foreign nonprofit, missionary and foundation engagement with capacity building and work in rural and urban spheres was interrupted by the 1949 victory of the Communist Party and the founding of the People’s Republic. Foreign nongovernmental groups generally ceased working in the PRC in the early 1950s, not resuming activities until after the formal end of the Cultural Revolution in 1976. But that is not the entire story. China’s Party and governmental authorities (working through Party and state agencies such as the Party International L ­ iaison Department, the Chinese People’s Association for Friendship with Foreign C ­ ountries, and various professional groups such as the Chinese ­Medical ­Association) maintained contact with some foreign and Hong Kong non­governmental ­organisations

1 See, eg, JYJ Hsu, State of Exchange: Migrant NGOs and the Chinese Government (Vancouver, BC, University of British Columbia Press, 2017); R Hasmath and JYJ Hsu (eds) NGO Governance and Management in China (Abingdon, Routledge, 2016). 2 In this work I am grateful to many other scholars, NGO and foundation personnel, and activists who have looked into these issues in China (and in Vietnam), and from whom I have learned much. They include Jessica Batke, Ira Belkin, Nguyen Thi Bich Diep, Horst Fabian, John Fitzgerald, Han Junkui, Heike Holbig, Jia Xijin, Elizabeth Knup, Bertram Lang, Katja Levy, Marko Lovrekovic, Nicola McBean, Patrick Schroeder, Shawn Shieh, Wang Cunkui, Wang Yongmei, Katherine Wilhelm, Zhang Ye, and others.

Charity Law Debates in China  39 and civil society individuals throughout the 1950s and until about 1965, and resumed contact with some organisations and groups in 1971–72.3 These were not extensive contacts, but they did result in continued engagement of an episodic sort, and, most importantly, invitations to re-engage through visits to China, particularly beginning in the early 1970s. China’s diplomatic representatives overseas, as a matter of policy, also had very extensive contact with NGOs, foundations and other nonprofit groups, again particularly in the early and mid-1970s. The result of this engagement was that China was considerably more knowledgeable about and ready to re-engage with the overseas NGO and foundation community in 1977 and 1978 than is generally acknowledged.4 Most importantly, this more nuanced history of Chinese contact with international civil society helped China developed more nuanced policy perspectives on these groups and their work when they began to return to China in the late 1970s. Beginning in 1978, China began to welcome the return of foreign NGOs, ­foundations and other charitable groups to work in China. The policy and regulatory environment that greeted those groups when they arrived in China was complex but not particularly restrictive – China wanted and needed foreign expertise, it believed, and so, in a process repeated over the years, regulatory and policy barriers to entry and operations were considerably lower when Chinese policy was to welcome such groups and use their knowledge, expertise, and funding. The fault lines were developed early, with different times in the 1980s and 1990s, both before and after Tian’anmen, being times of emphasis of one side of the fault line – relatively relaxed policies toward the international and Hong Kong nonprofit community. And yet the other side of the fault line appeared as well. At times over the ensuing several decades, there was much more scrutiny, and much more control – particularly in the first year or two after the Tian’anmen events of 1989, when more conservative policy actors in China singled out foreign NGOs and foundations for blame for ‘peaceful evolution’ and for, in their view (but not in others’ views) seeking to weaken or bring down the Chinese Communist Party. Periodic such suspicion and more restrictive policies toward foreign nonprofits occurred at several other points as well – for example, briefly in 1987 at the time of the anti-‘bourgeois liberalisation’ campaign, and at times before major Party or state meetings. 3 See, eg, David and Nancy Milton, The Wind Will Not Subside: Years in Revolutionary China, 1964–1969 (New York, Pantheon, 1976). Henry Kissinger also discusses China’s approaches to ­American and other nongovernmental groups and individuals in his early memoirs, White House Years (New York, Simon & Schuster, reprinted 2011). 4 In at least one case, China explicitly urged an American group of doctors to form a nonprofit group to engage in early post-Cultural Revolution contact with the Chinese Medical Association and to travel to China to resume medical exchanges in the wake of the end of ‘Gang of Four’ control of the Ministry of Health in China. That group, the ‘US-China Medical Exchange Committee’, sent several small groups to China in 1977 and 1978 and later disbanded as exchanges grew across multiple fronts. (The author travelled with one of those groups to China in 1977.)

40  Mark Sidel The history of China’s policies toward international and Hong Kong nonprofits from 1978 until about 2012 was of distinct perspectives, one more relaxed and one considerably more suspicious, and the calibration of policies based on what the foreign groups were doing. International and Hong Kong advocacy groups, for example, were always subject to harsher controls, falling on the more authoritarian side of the policy fault line. One reason why China was able – or felt able – to employ a relatively tolerant attitude toward a number of foreign civil society groups was because of the organisational and bureaucratic strength of security ministries within the Chinese government and Party – particularly the Ministry of State Security and the ­Ministry of Public Security. While the forward-facing policy was often one of welcome, Party and government leaders had confidence that they would know of real problems through the security ministries and could deal with such issues as they arose. This relatively benign framework was never without problems for foreign and Hong Kong nonprofit groups working in China. But it began to shift toward a much more controlled framework after the rise of Xi Jinping in 2012, as I discuss in the next section.

III.  From Fault Lines to Decisions: Making the Policy Decision for a Much More Controlling Policy, 2012 to the Present In about 2012, Chinese policy toward foreign and overseas NGOs and foundations began to shift toward the harder position, a shift that was later reflected in the 2016 Law of the People’s Republic of China on the Administration of Activities of Overseas Nongovernmental Organisations in the Mainland of China (Overseas NGO Law).5 The rise of Xi Jinping in China accelerated the strengthening of the role of the state in society. In the economic sphere, the state-controlled and stateowned sector received more emphasis and protection vis-à-vis the private sector. Harshly restrictive moves toward the Tibetan population in Tibet were migrated to ­Xinjiang, where the Uighur population has come under increasing security controls that are by now well-known. In the political sphere, pressure on human rights defenders and lawyers, critical intellectuals, reformist think tanks and intellectual groups, and others increased significantly, beginning with Xi Jinping’s assumption of power in 2012. A more laissez-faire attitude toward domestic social organisations and other nonprofit

5 An official text of the Overseas NGO Law is at www.chinafile.com/ngo/laws-regulations/ law-of-peoples-republic-of-china-administration-of-activities-of-overseas.

Charity Law Debates in China  41 groups was replaced with more controls on registration and operations, with a focus on controlling and limiting advocacy organisations.6 This restrictive environment was applied to the overseas nonprofit sector as well. China under Xi Jinping was making a choice across the fault line of policy toward overseas civil society – a policy decision between a more relaxed approach that offered overseas groups more flexibility of organisation and activities in China, and a more restrictive approach that limited activities, organisational arrangements in China, and operational matters. The restrictive side of the fault line had always been present. For many years, some Party and security officials in China had believed, or said they believed, that civil society organisations and actors had played leading roles in the ‘color revolutions’ that had occurred across Central and Eastern Europe, the Arab world and North Africa, and, just before Xi came to power in 2012, in the Hong Kong Occupy Central (Umbrella) movement. The ‘color revolutions’ and related security concerns were regularly cited as a key reason for more controls, and for the d ­ ecision to come down hard on the restrictive side of the policy debate and fault line. There were other aspects to the policy decision in 2012 and after to break toward the restrictive side of the fault line on overseas groups in China. The more open policy perspective – that side of the fault line – had allowed overseas nonprofit groups to organise and affiliate themselves in diverse ways in China, with various government ministries and other groups; as businesses; and even to remain in the shadows as unregistered overseas organisations, with the Ministry of Civil Affairs as a kind of loose coordinator of policy. The much more restrictive policies that came to be adopted after 2012 dispensed with that relatively relaxed approach. The new policies centralised control over the overseas nonprofit groups in one place, the Ministry of Public Security. Before 2012, the more relaxed policy approach, on the more flexible side of the policy fault line, had permitted and encouraged policy innovation and experimentation on overseas nonprofit groups at the subnational level, in some province-level units such as Guangzhou and Yunnan. The harder policy side of the fault line adopted after 2012 centralised virtually all policy and decision-making at the national level, upward into the Ministry of Public Security. Before 2012, the more relaxed side of the fault line permitted a significant range of funding and collaboration between some overseas (including Hong Kong and Taiwan) NGOs and foundations and activist advocacy NGOs in China. The other side of that fault line would have severely limited that funding and collaboration, and that is the policy side that won out after 2012. 6 There is now an extensive literature on shifting, centralising and more restrictive policies in the Xi Jinping era. Among many sources that could be cited, see, eg, E Economy, The Third Revolution: Xi Jinping and the New Chinese State (New York, Oxford University Press, 2018), and for a historical approach, K Muhlhahn, Making China Modern: From the Great Qing to Xi Jinping (Cambridge, Harvard University Press, 2019).

42  Mark Sidel After 2012, the Chinese Party/state has sought to discourage overseas NGOs and foundations from working closely with government and nongovernmental policy groups in Beijing and at the subnational level. And the Party sought to bring together disparate streams of regulation and security attention on Hong Kong, Taiwanese and other groups in one overall, more strictly controlled structure. It was that concern about Hong Kong and Taiwanese influence and ties to domestic advocacy groups in China that resulted in the Overseas NGO Law governing not just ‘foreign’ NGOs, foundations and other entities but the wider category of ‘­overseas’ (境外) organisations, a definition that explicitly included Hong Kong and Taiwanese NGOs. In all these areas there were distinct policy positions before 2012 that generally fell in the range from somewhat less restrictive and controlling to much more restrictive and controlling. A national law on the work of overseas NGOs, foundations, trade associations, think tanks and other overseas nonprofits languished for many years in part because of this spectrum of policy views, matters that directly related to a spectrum of political views in China. That fault line – a spectrum of fault lines – persisted until Xi Jinping took power in 2012. Then decision-making on the fault line started, and the choice was toward the considerably more restrictive and controlling positions.

IV.  The Party/State and Overseas Nongovernmental Organisations Since 2012 The turn from a divided fault line spectrum of positions to making the policy choice toward a more controlling environment began shortly after Xi Jinping came to full power in 2012. These steps began with a national survey of foreign NGOs and foundations in 2013 and 2014, and then a fateful decision in the second half of 2014 – a key decision between fault line positions – to turn comprehensive control over overseas NGOs, foundations and other overseas nonprofits in China from the Ministry of Civil Affairs, the State Administration of Industry and Commerce, and other entities to one security agency, the Ministry of Public ­Security, as a centralising and securitising measure. The outcome was no more divided authority, at least in this field of policy toward overseas NGOs, foundations and other nonprofits; no more division in which the Ministry of Civil Affairs might be loosely (and weakly) responsible for registration and policy issues and the Ministry of Public Security for security issues. The long debate and spectrum of positions, at least in the area of overseas nonprofits working in China, came down decisively in favour of Public Security control. That decision was taken by a key Party organisation, the National Security Commission, in 2014. With the Ministry of Public Security now in charge, the Ministry was tasked with drafting a national framework law to exercise control over the r­ egistration

Charity Law Debates in China  43 and activities of overseas NGOs, foundations and other nonprofit groups. It proceeded to do so during 2015. The Ministry submitted the initial draft to the National People’s Congress in late 2015, much to the surprise of most of the foreign nonprofit community, and requested comments in 2016. Those comments were largely negative, from both domestic and foreign constituencies. With minor changes discussed below, the National People’s Congress enacted the Law on the Domestic Activities of Overseas Nongovernmental Organisations of the PRC (the Overseas NGO Law) in April 2016, and it became effective on 1 January 2017.7 Although most policy debates in this area had been resolved by the Party with the decision that Public Security would be responsible for overseas nonprofits operating in China, one remaining policy controversy arose at the final stages of deliberation over the Overseas NGO Law in the National People’s Congress. Many of the foreign and domestic complaints about the draft law (and by extension the now overarching role of the Ministry of Public Security) reflected deep concerns that Public Security would now govern and control relationships between Chinese universities, research institutions and other academic institutions and their ­overseas academic, foundation and other counterparts. The draft Overseas NGO Law could well have been read that way. Reflecting those deep concerns, and responding to different policy perspectives in China, an amendment to the draft Overseas NGO Law was negotiated as it was before the National People’s Congress in April 2016. A new Article 53, inserted after pressure by Chinese universities and overseas institutions, provided that Chinese ‘academic exchange and cooperation’ with overseas academic institutions would remain governed by earlier rules that put the Chinese Ministry of Education and State Council (cabinet office) in charge of policy on those relationships. While the amended Overseas NGO Law did not make clear what the definition of ‘academic exchange and cooperation’ was, the specific policy debate, complaints, and controversy did lead to a ‘cut out’ for Chinese academic institutions in their cooperation with foreign institutions that was written into the Overseas NGO Law. With that single substantive amendment, which took an as-yet-undefined range of ‘academic exchange and cooperation’ activities out of Public Security control, the Overseas NGO Law was passed in late April 2016. The fault lines were now gone; the debates were over. A new institutional control organisation was in place, and a new law to provide the basis for its authority. The Overseas NGO Law has prescribed an entirely new and comprehensive framework for the regulation of overseas NGOs, foundations and other nonprofits in China. In basic terms, such overseas groups that are organised in nonprofit form must either register an office in China (by working with an approved Chinese

7 I outline these developments in more detail than is possible here in M Sidel, ‘Managing the Foreign: Regulating Foreign Nonprofit Organizations in China in the Xi Jinping Era’ (2018) Voluntas: International Journal of Voluntary and Nonprofit Organisations, https://doi.org/10.1007/s11266-018-9988-8.

44  Mark Sidel partner), or report ‘temporary activities’ generally lasting one year or less (also by working with an approved Chinese partner) through the Ministry of Public Security. In regulating registration, operations, fundraising, employment of staff, acceptable activities and a range of other matters, China’s framework is considerably more restrictive and controlling than earlier policies, and it is considerably more comprehensive than the policy initiatives of some other countries in seeking to restrict and control foreign funding coming into their countries. Once the debates ended and the fault line cleared, and now after two years of implementation of the Overseas NGO Law, its impact is becoming clear. For a number of reasons, it has proven difficult for many overseas nonprofit groups to continue work in China – in many cases because they have difficulty getting ­agreement of a required Chinese substantive partner to either apply to register an office in China, or to file their notification of ‘temporary activities’.8 Chinese partner organisations, usually government agencies but in some cases government-organised nonprofits or other groups, have had little incentive to partner and become responsible for the activities of foreign NGOs, foundations or other groups that may operate in multiple Chinese provinces and/or in multiple fields, especially when an immensely powerful security organisation, the Ministry of Public Security, is in overall control of this area. And yet many hundreds of overseas NGOs and foundations have indeed registered or filed temporary activities under the Overseas NGO Law, so Chinese policy is more nuanced than merely ‘closing space’ and forcing the overseas civil society community out of China. Instead, with the debates over and the fault lines cleared, China is seeking to mould the overseas nonprofit sector that works in and with China, just as it is seeking to mould its domestic nonprofit sector. That moulding focuses on encouraging some organisations that concentrate on service delivery (including innovative forms of service delivery); requiring all organisations to be legalised in some form (and making that process more complex); discouraging or repressing a wide range of advocacy and grassroots organisations; and keeping closer tabs on what both domestic and overseas groups are doing. Through the end of November 2019, some 510 overseas organisations have registered offices in China under the Overseas NGO Law, and some 2,301 temporary activity filings have been made.9 For those organisations that have successfully negotiated the office registration or temporary activity process, that legalisation – which is viewed as a positive by many overseas NGOs and other groups – also came with more restrictions than they operated under in the past. Since both official Chinese partners and the Ministry of Public Security now had to approve activities, and approvable activities are now limited to seven 8 On these difficulties, see, eg, X Jia, ‘Two Years of the Overseas NGO Law’ (China Development Brief, 10 December 2018) at: www.chinadevelopmentbrief.cn/articles/jia-xijin-two-years-of-theoverseas-ngo-law/; Sidel, ‘Managing the Foreign’ (2018) (n 7). 9 For these and other updated statistics, drawn directly from data from the Ministry of Public ­Security, see the ChinaFile NGO Project: www.chinafile.com/ngo.

Charity Law Debates in China  45 areas that include education, health, environment, and other service-oriented fields, overseas groups have begun self-censoring and re-directing their activities away from advocacy and policy work in a number of cases. The Chinese Party and government’s moulding agenda, under the unified control of the Ministry of Public Security, has been quite successful in the first two years of the implementation of the Overseas NGO Law.10 The first two years of the implementation of this new framework (2017–2018) have resulted in overall control of the overseas NGO and foundation sector in China effectively passing rapidly to the Ministry of Public Security, exercised through Chinese partner agencies and by the Ministry and its provincial agencies as well. After two years, a new stage in this process has begun – having rapidly achieved control of the situation, the Ministry and Chinese partner agencies are now focusing on a more gradual series of attempts to mould the programmatic agenda of overseas NGOs and foundations. For some organisations, the ­Ministry and partner agencies have encouraged them to become involved in China’s ‘Belt and Road’ internationalisation initiative, often alongside domestic Chinese NGOs and other groups that are ‘going out’ into the world.11 For some groups, the Ministry of Public Security and partner agencies are ­gradually encouraging a nationalisation of organisational leadership, a transition from foreign to Chinese leadership of the organisation in China when a foreign representative departs. And in some cases, organisations are choosing to re-legalise as Chinese entities rather than as foreign entities in China, a nationalisation of status that brings organisations directly under Chinese domestic nonprofit legislation but also may enable them to fundraise in China, which is available for certain kinds of domestic (Chinese) organisations but is prohibited by the Overseas NGO Law to overseas groups.12

V.  Beyond Extended Control: Areas of Continued Policy Decision-Making – But Not Much Debate While overall control of the overseas NGO and foundation sector was achieved by the Ministry of Public Security within the first two years of implementation 10 For an important Chinese view of these developments, see X Jia, ‘Two Years of the Overseas NGO Law’ (10 December 2018) (n 8). For another summary of developments by another knowledgeable observer, see S Shieh, ‘Remaking China’s Civil Society in the Xi Jinping Era’ (ChinaFile, 2 August 2018) at: www.chinafile.com/reporting-opinion/viewpoint/remaking-chinas-civil-society-xi-jinping-era. 11 I have learned this in interviews and conversations with a number of overseas NGOs working in China. For one public report, see: ‘Overseas NGOs attend “One Belt and One Road” forum (China Development Brief, 11 May 2017) at: www.chinadevelopmentbrief.cn/news/overseas-ngos-attend-onebelt-and-one-road-forum/. 12 The key domestic Chinese legislation that makes this possible is the Charity Law of the People’s Republic of China, enacted on 16 March 2016 and effective 1 September 2016. See: http://en.pkulaw.cn/ display.aspx?cgid=5df107e39adb063fbdfb&lib=law.

46  Mark Sidel of the Overseas NGO Law, some matters remained to be cleaned up. The Ministry is now beginning to focus on some of those areas. But that does not mean policy debates. In this area of overseas nonprofits operating in China, the debates are largely over for now; the fault lines have been crossed and positions decided upon. But some issues remain complicated, even when there isn’t policy debate. One example is overseas NGO and foundation work with Chinese universities, and the work of overseas universities with Chinese universities that seems akin to NGO-type activity. The Ministry of Public Security did not unduly focus on these arrangements in the first two years of the implementation of the Overseas NGO Law, in part because of the political sensitivity of matters involving Chinese universities, but also because university relationships with NGOs, foundations and foreign universities were already well-reported through other channels. There was also an ambiguity in the Overseas NGO Law, arising from a late change made at the National People’s Congress before it was enacted, as mentioned above. A new Article 53, inserted after pressure by Chinese universities and overseas institutions, provided that ‘academic exchange and cooperation’ with overseas academic institutions would remain governed by earlier rules for which the ­Ministry of Education and the State Council were responsible. The Overseas NGO Law did not make clear what the definition of ‘academic exchange and cooperation’ was, leading to confusion in its first two years of implementation as to which sorts of academic activities were part of regular ‘academic exchange and cooperation’ and which were NGO-type activities that fell outside Ministry of Education control, into Ministry of Public Security control. While overseas universities, NGOs and foundations might have hoped for a definitional answer to the key question: ‘what is academic exchange and cooperation under Article 53 (and thus subject to Ministry of Education regulation) and what is not (and thus subject to the Overseas NGO Law and the Ministry of Public Security?’, China has given no such answer. Instead, it has permitted a certain range of university-to-university relationships to remain in place, including some that ‘look’ like NGO-type activity (such as support for legal clinics or some kinds of advocacy training) but could also be defined as ‘academic exchange and cooperation’. There is little doubt, however, that exchanges and cooperation between Chinese universities and their overseas counterparts have significantly slowed in the Xi Jinping years. On a related front, Chinese universities, presumably with the support and direction of Public Security and Education, have begun enacting university-level regulations on cooperation with overseas nongovernmental organisations, including foundations. This cooperation was already considerably more difficult in the Xi Jinping era compared to earlier, and the new rules make it likely that even less programmatic cooperation will take place. The new rules are not all worded the same, but they erect multiple and complex approval barriers for university projects involving overseas NGOs and foundations; bring Party committees within universities into the approval process, sometimes at multiple steps; and

Charity Law Debates in China  47 give a strengthened role to the security departments of universities. None of this is novel in the control-based era China is in, but the new regulations codify these restrictions for work with overseas NGOs and foundations.13

VI.  When the Debates are Over: A New Typology of Overseas Nongovernmental Organisations in China The result of this resolution of policy debates is an increasingly securitised, centralised and controlled environment and a new typology of overseas nongovernmental organisations in China. There are roughly between 500 and 1,000 survivors, as I term them, which have achieved either office registration or the filing of one or more temporary activities under the Overseas NGO Law, and in that process have developed an official working relationship with one or more Chinese partner organisations, as the legal framework requires.14 A significant number of these are trade associations, which the Chinese government generally welcomes and does not view with the same suspicion as NGOs and foundations. As noted above, these organisations are generally pleased to still be working in China, but their successes come with costs as well. In particular, the increased legalisation that is available under the Overseas NGO Law also results in less ­freedom of activity in China; less programmatic freedom; less opportunity to interact and work with advocacy, unregistered, informal or dissident groups; increased pressure to nationalise staff or staff leadership in China; and, at times, increased pressure to nationalise status into a Chinese entity. Legalisation (through office registration or ‘temporary activity’ filings) under a more restrictive legal regime has its costs, and they can be significant. The great benefit of legalisation under the Overseas NGO Law is staying and working in China; the cost is less flexibility.

13 These regulations are generally in the form of ‘Management Methods for the Activities of Overseas Nongovernmental Organizations at xx University’ or similar wording. For an example, see the Chinese University of Science and Technology Management Methods for Activities by Overseas Nongovernmental Organizations within the University, released in September 2017, available at: https://bwc.ustc.edu.cn/_ upload/article/files/21/a6/69119f7a4aac86081628402a24c7/7de36764-6f49-4715-8a8a-2e66787bc065. pdf. 14 In refining this typology, I have benefited from the typology work carried out by several European scholars of these developments in China, including Horst Fabian, Andreas Fulda, Nicola MacBean, and Patrick Schroeder. See, among other contributions, G Corsetti, ‘Asia Dialogue publishes policy briefs on the effects of the Overseas NGO Law on European NGOs’ (China Development Brief, 17 July 2018) at: www.chinadevelopmentbrief.cn/news/asia-dialogue-publishes-policy-briefs-on-the-effects-ofthe-overseas-ngo-law-on-european-ngos/; and A Fulda, ‘The contested role of foreign and domestic foundations in the PRC: Policies, positions, paradigms, power’ (July 2017) 7 Journal of the British Association for Chinese Studies, at: www.researchgate.net/publication/318898939_The_contested_role_ of_foreign_and_domestic_foundations_in_the_PRC_policies_positions_paradigms_power.

48  Mark Sidel A second group of organisations, much smaller in number, have ‘regionalised,’ or moved their China operations to Hong Kong or another place in the region, while still seeking to work informally (or through temporary activities) in the PRC. Among those organisations are the American Bar Association Rule of Law Initiative (ROLI) and the International Crisis Group, one of whose Canadian staff is currently under arrest in Beijing as a direct result of Canada’s extradition proceedings against Ms Meng Wanzhou, a high-ranking Huawei corporate executive, on a request from the US. But that detention also points to the potential dangers of having overseas NGO or other personnel continue to travel and meet in China where the organisation has not yet obtained office registration or made temporary activities filings. Such activities may be defined in China as a violation of the Overseas NGO Law and are thus more dangerous in some cases than they were before.15 Continuing our typology, a third group of overseas NGOs under the new Chinese framework are what I and others term ‘workarounders’. They have sought to work around the Overseas NGO Law and framework in order to continue activities in China. Workarounds may include re-registering or switching operations to a corporate umbrella or as a corporate-based social enterprise (which is less explicitly covered by the Overseas NGO Law); operating under the radar in China through remaining Chinese staff or consultants or, less frequently, through overseas Chinese staff or consultants; sending staff in from Hong Kong, Taiwan, or elsewhere around the world (overlapping with the ‘regionalisers’ above) for meetings and activities; and through other methods. Some of these methods are more risky than others under current circumstances. The point here is that in an era when there were fault lines, when policy debates had not been resolved, many such ‘workarounder’ organisations lived in the shadows in China or openly flaunted their corporate filings. That is more difficult now. Another group are what I and others term ‘hibernators’ – they are sitting out the China situation for the time being, waiting for more clarity on the circumstances there, or for potential Chinese partners to appear who can help them with a legalisation status.16 There are many such organisations, it appears, though they tend to remain quiet about their status. At a time when there were still fault lines and policy debates, many such organisations worked quietly in China, operating in the shadows, through consulting companies, and in other ways. As policy debates have been resolved, some such organisations that were operating in the shadows are now hibernating.

15 For a more recent example, of a leader of a Hong Kong LGBT group, Rainbow China, unregistered in China, who was detained, sent back over the border, and barred from the mainland for five years, see Batke, ‘First Case of an Administrative Detention Linked to the Foreign NGO Law?’ (­ChinaFile, 22 January 2019), linking to Hong Kong reporting on this case, at www.chinafile.com/ngo/latest/ first-case-of-administrative-detention-linked-foreign-ngo-law. 16 See: ‘Give2Asia Webinars: How Survivors are Navigating the New Environment’ (ChinaFile, 27  November 2018), www.chinafile.com/ngo/latest/give2asia-webinar-how-survivors-are-navigatingnew-environment.

Charity Law Debates in China  49 In addition, there are overseas NGOs working with human rights defenders and lawyers and dissidents and their families who feel that they must remain active in China but have no possibility of any form of legalisation under current circumstances. In many cases they already worked in a shadowy way, even before the more restrictive steps taken by the regime, and in some cases their work – channelling funds to individuals and families in China, for example – has been driven further underground. Given the information and enforcement resources of the Chinese government, this is exceptionally dangerous work indeed. And, finally, there are overseas NGOs and foundations that have decided for various reasons that they need to move on from China. Their reasons are often tied to the resolution of policy debates in China toward a considerably more restrictive framework. Their reasons include the much more significantly controlled environment in China; the complexities of trying to work in China in some sort of legalised status; China’s rising prosperity and a sense that their work is more needed elsewhere; a sense that China is no longer interested in the development or relief or advocacy work they have to offer; and combinations of these motivations. Some announce their moving on; others remain quiet. In the first two years of this new framework (beginning in January 2017), the Ministry of Public Security as regulator and enforcer focused on bringing the vast majority of overseas NGOs and foundations in China under their umbrella of control. In that task they were successful. In the next stage, which roughly begins in 2019, Public Security and NGO and foundation partners are beginning to become more closely focused on enforcing the Overseas NGO Law framework for those already within the umbrella of control. Increasingly, NGO partners or Public Security units are asking questions about proposed activities and, in some cases, indicating that they do not approve. In a few cases, most particularly a recent case involving the leader of an LGBT organisation in Hong Kong, overseas NGO personnel traveling to China have been questioned or detained, ostensibly on grounds that their travel and work in China without a registration or temporary activities under the Overseas NGO Law is illegal. In the case of the Hong Kong organisation, the Hong Kong individual detained in China was sent back over the border to Hong Kong with an order barring him from the mainland for five years.17 The Overseas NGO Law has also been cited in other detentions, including that of Michael Kovrig of the International Crisis Group in January 2019, though that detention was directly in retaliation for ­Canada’s holding of a senior Huawei corporate official, and the initial citation of the Overseas NGO Law was merely an initial excuse. It was directly used in the case of Cheung Kam Hung of Rainbow China (Hong Kong), discussed above. Now that initial control has been established in the first two years of the new Overseas NGO Law framework, enforcement is beginning to tighten. At the same



17 See

Batke, ‘First Case of an Administrative Detention Linked to the Foreign NGO Law?’ (n 15).

50  Mark Sidel time, some quiet conversations have begun in China about issues and ­inefficiencies with the Overseas NGO Law. The Ministry of Public Security is gradually gathering data and experience on how it has been implemented. It is not at all clear where that gathering of experience and data will lead – just toward better information for the security forces, or toward informal, quiet shifts in implementation, or perhaps even, over time, to discussions of amendments to the Overseas NGO Law or its implementing frameworks. That does not necessarily imply shifts in the terms of policy debates, but more likely better implementation of policy decisions that have been made and are maintained. Some of the key issues in implementation of the Overseas NGO Law include (1) its ban on fundraising by overseas entities; (2) making unrestricted charitable gifts into Guangdong, in a separate arrangement that appears to have been approved by Guangdong provincial public security authorities, perhaps with the agreement of the Ministry of Public Security in Beijing; and (3) confusion and inefficiencies in the rules and process surrounding temporary activities filings by partners of overseas NGOs and foundations. In the first situation, the Overseas NGO Law’s ban on fundraising by overseas entities, this prohibition has been criticised in China, including once publicly by a very well-known Chinese philanthropic leader and commentator. The unrestricted charitable gifts into Guangdong organisations without complying with the registration or temporary activities requirements of the Overseas NGO Law can be viewed as a policy experiment, but it is not clear whether central authorities will allow that to persist, or end it, or allow it to spread. And the many and varied confusions and inefficiencies in temporary activities filings are well-known to Public Security. This information comes to the central Ministry of Public Security through multiple channels, indicating the diversification of information about the overseas NGO process in China and the broadened range of actors that have direct experience with the new framework. Public Security bureau at the municipal/ provincial and district level now have extensive experience with implementing the Overseas NGO Law, particularly in such cities (province-level units) as Beijing and Shanghai. They are reporting issues to Beijing. So too are Chinese partner agencies, overseas NGOs, foundations, trade associations and other entities, and foreign governments. The US government, for example, informed the Ministry of Public Security of a range of issues with the new legal framework in the run-up to and at a bilateral dialogue on the implementation of the Overseas NGO Law in 2017.18

18 See: ‘United States and China Hold Consultation about Foreign NGO Law’ (ChinaFile, 18  December 2017) at: www.chinafile.com/ngo/latest/united-states-and-china-hold-consultationabout-foreign-ngo-law.

Charity Law Debates in China  51

VII. Conclusion In summary, before 2012 there were a range of policy perspectives on the control of overseas nongovernmental organisations, foundations and other nonprofits operating in China. Policy debates – fault lines – on those issues had persisted for many years, resulting in a long delay in the drafting of a national omnibus law governing the work of overseas nonprofit organisations in China and divided authority within China over this important sector. Those policy debates were resolved beginning in 2012 when Xi Jinping came to power. The Chinese Communist Party decided that overseas NGOs, foundations and other groups needed more substantive and institutional controls, a narrowing of channels toward legalisation, and overall, comprehensive control by one strong element of Chinese state machinery. The policy debates were concluded; the fault lines were bridged by a decision for significantly more restrictive control. The Ministry of Public Security was put in charge. Thus since 2016 China has dramatically centralised and securitised its relationships of control and monitoring over overseas NGOs, foundations, trade associations, and similar entities. It has done so as part of an overall tightening of Chinese life and strengthening of the role of the Communist Party and the state in recent years. Overseas NGOs and foundations are, and feel, less welcome in China than in earlier eras, and are experiencing more constraints in their work, as well as some pressures to respond to Chinese programming mandates. The Ministry of Public Security has without question become the most powerful Chinese institutional actor on issues related to overseas nongovernmental and philanthropic activity. After several years of taking control of this sector, the Ministry of Public Security is beginning to deal with some remaining issues, but consideration of those issues does not reopen the policy debates that were settled and decided after 2012. From that decision, the institutional choice of a security agency to govern the overseas nonprofit community flowed; a restricted group of permitted activities flowed; a narrowing of channels toward a legalised status in China flowed. Policy debates have largely ended, and overseas NGOs, foundations and other nonprofits operating in China are in a new world.

52

4 Regulating Egoism in Perpetuity JOHN PICTON1

I. Introduction While ordinary trusts are time-limited, the charitable foundation lasts forever.2 It is, in consequence, a perpetual legal vehicle through which a donor might seek to egoistically project her character and values into the future after her death. Unfortunately, that self-serving drive leads to bad charity, causing waste, as it crowds out higher social utility – or altruistic – uses of capital. Through attention to the concept of egoism, as it has developed in contemporary donative economics (‘egoistic theory’),3 this chapter explores the nature of the motivation to create perpetual foundations, and, flowing from that theorisation, it then critically ­develops a policy justification for the protection of the donor’s plans (plan-protection), alongside development of a legal-conceptual method for the utility-orientated reform of foundations. A dispute over a change of organisational course, where a judge might be asked to set aside the donor’s plan, normally arises out of the dissatisfaction of reform-minded trustees. This legal scenario, which pits the perpetual vision of a dead benefactor against the sentiment of a charity board, is both striking and the basis of a substantial body of precedent. By way of illustration, in creating the Leonard and Beryl Buck Foundation, a donor named Beryl Buck set up on her death a charity funded by oil capital.4 Such foundations – so often the creature of 1 With thanks to Michael Gordon, Robert Knox, Jennifer Sigafoos and the anonymous reviewer for comments on earlier drafts of this chapter. 2 Re Faraker [1912] 2 Ch 488 (CA); Law Commission, The Rules against Perpetuities and Excessive Accumulations (Law Com LC251, 1998). Here the ordinary-language term ‘foundation’ is used to mean a ‘perpetual charitable trust’ as it indicates an organisation founded from individual capital. 3 See for discussion on egoism in connection with giving in donative economics: J Elster, ‘The Valmont Effect: The Warm-Glow Theory of Philanthropy’ in P Illingworth, T Pogge and L Wenar (eds), Giving Well: The Ethics of Philanthropy (Oxford, Oxford University Press, 2011) 67; A Kotzebue, On Collective Goods, Voluntary Contributions and Fundraising (Karlsruher, Springer Gabler, 2013) 4–13; AK Sen, ‘Rational Fools: A Critique of the Behavioural Foundations of Economic Theory’ (1977) 6 Philosophy and Public Affairs 317. 4 See for an excellent exegis and analysis of the case: R Sisson, ‘Relaxing the Dead Hand’s Grip: ­Charitable Efficiency and the Doctrine of Cy Pres’ (1988) 74 Virginia Law Review 635; Re Buck, No 23259 (Cal Super Ct, Marin Cty, Aug 15, 1986).

54  John Picton a wealthy donor – can act as perpetual memorials, and it is possible to discern, even long after her passing, elements of the donor’s personality and values from the terms of her foundation. It is telling that she named the foundation after herself and her husband, and also that she attempted to restrict the function of the charity to religious and educational purposes in service of the needy of Marin County,­ California – a geographically small, but extremely wealthy, part of San ­Francisco, where she had lived. Yet these restrictions, the terms-of-gift flowing from her ­character, proved to be difficult to carry through. The charity was extremely wealthy, and its bounty was difficult to expend in such a small and prosperous area. A reform-minded trustee,5 concerned not to waste philanthropic capital, applied to court to make grants in the less well-off parts of San Francisco. And so, as is commonly the case, efficiency was set in conflict with the donor’s perpetual wishes. Despite the social utility of the reform proposal, the trustee met considerable local legal resistance. Although the litigation was in the end resolved outside of court, the trustee lost the battle, and Beryl Buck’s plans were left protected in perpetuity. The impasse faced by Beryl Buck’s foundation reflects a policy problem. Very often, a reform contrary to the plan of the donor will increase the efficiency of the foundation. Thus, on the one hand, it is sometimes said that tolerance of ­wasteful charity undermines the true social purpose of organisations.6 On the other hand, a counter-argument can be made that strict plan-protection of the donor’s vision is likely to encourage donation.7 That is to say, donors such as Beryl Buck are incentivised by their ability to place perpetual restrictions on their gifts. Prompted by this debate in charity law, this chapter ultimately develops a compromise between adherence to the original plans of the donor and the policy imperative that capital in foundations should be spent efficiently. It does so through recourse to motivational theory as it has developed in contemporary donative economics. Applying that theory of volition,8 it points a way to understand what motivates people to create perpetual foundations and then assesses whether reform deters their giving. Donative economics is, in essence, a theory of motivation for giving. All founders derive satisfaction from charity, as that makes for the cause of the action. In order to go beyond the tautology that donors want to give, it is necessary to pinpoint what makes them desire to consume charity. The analytical split between egoism and altruism within the theory is an attempt to do 5 It was an institutional trustee asking for reform in this case, named the San Francisco Foundation. 6 A Hobhouse, The Dead Hand: Addresses on the Subject of Endowments and Settlements of Property (London, Chatto & Windus, 1880) 230; J Garton, ‘Justifying the Cy-Pres Doctrine’ (2007) 21 Trust Law International 134; R Atkinson, ‘Reforming Cy Pres Reform’ (1992) 44 Hastings Law Journal 111, where it is argued on effectiveness grounds that trustees should have ultimate control of the charity assets. 7 S Gary, ‘The Problems with Donor Intent: Interpretation, Enforcement, and Doing the Right Thing’ (2010) 85 Chicago-Kent Law Review 977, 1002; P Luxton, ‘Cy-près and the Ghost of things that might have been’ (1983) 47 Conv 107, 116; J Macey, ‘Private Trusts for the Provision of Private Goods’ (1985) 37 Emory Law Journal 295, 304. 8 Both economic altruism and egoism describe the exercise of voluntary choices. See, eg, K Boulding, ‘Notes on a Theory of Philanthropy’ in F Dickinson (ed), Philanthropy and Public Policy (Cambridge, Cambridge University Press, 1962) 57, 60–63.

Regulating Egoism in Perpetuity  55 that. It posits a framework in which donors have either a primarily selfless or a primarily self-benefitting motivation. The altruistic motivation in creating a foundation is the most intuitive. It is the circumstance where a founder is motivated by providing material help to others,9 or to provide some generally consumable public good that everyone will benefit from.10 If Beryl Buck’s motivation had been purely altruistic, she would have had no concern for the perpetuation of her and her husbands’ name or for social esteem in her own local community. Her satisfaction would instead have flowed from the consumption-activity of others – ie she would have consumed vicariously by establishing a charitable organisation from which others would benefit.11 More generally, this altruistic drive might be understood by analogy to buying dinner for an ungrateful child and pursuing that endeavour regardless of any other reward. Altruism, conceived in this manner, can be understood as the merging of the wants and desires of others with those of the donor. By contrast, egoistic satisfaction arises where the material consumption of another or others is not in fact the motivation behind the gift.12 An egoistic donor will take pleasure from a self-benefit. So, with reference to the child’s dinner analogy, an egoistic donor might need the child to reward her with an endearing ‘thank you’; or she might be driven to impress the child’s parents; or perhaps she just knows that she will feel an indulgent warm glow, a self-congratulatory sense of her own objective goodness. The key point is that without a reward incidental to the consumption by the child, no dinner would be forthcoming. For the purely egoistic donor, it is the pleasure in self-benefit which motivates the giving. Donors will often be driven by both egoism and altruism at once,13 but where their egoism is unalloyed, the self-benefit provides the totality of the drive to give. In the light of donative economics, it is argued in this chapter that the drive to perpetuity – to create a restricted organisation which lasts forever – is per

9 For a model in which consumption by the head of a family for the benefit of the members of that family is treated as analogous to consumption by a charitable founder for the benefit of members in society, see G Becker, ‘A Theory of Social Interactions’ (1974) 82 Journal of Political Economy 1063, 1083; R Sugden, ‘On the Economics of Philanthropy’ (1982) 92 The Economic Journal 341, 342. 10 For analysis of public good consumption as altruistic, see R Roberts, ‘A Positive Model of Private Charity and Public Transfers’ (1984) 92 Journal of Political Economy 136. For critical elaboration, see S Rose-Ackerman, ‘Altruism, Nonprofits, and Economic Theory’ (1996) 34 Journal of Economic Literature 701, 713. 11 See, eg, P Warr, ‘The Private Provision of a Public Good is Independent of the Distribution of Income’ (1983) 13 Economic Letters 207. 12 See J Andreoni, ‘Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving’ (1990) 100 The Economic Journal 464; W Harbaugh, ‘The Prestige Motive for Making Charitable Transfers’ (1998) 88 The American Economic Review 227; see generally A Rutherford, ‘Get by with a Little Help from my Friends: A Recent History of Charitable Organisations in Economic Theory’ (2010) 17 European Journal of Economic Thought 1031. 13 J Andreoni, ‘Philanthropy’ in S Kolm and J Ythier (eds), Handbook of the Economics of Giving, Altruism and Reciprocity (Amsterdam, Elsevier, 2006) 1126; P Glimcher et al, Neuroeconomics: Decision-Making and the Brain (Amsterdam, Academic Press, 2009) 317; B Kingma, ‘Public Good Theories of the Non-Profit Sector: Weisbrod Revisited’ (1997) 8 Voluntas 135, 139.

56  John Picton se ­egoistic. Rejecting an inference from existing fundraising literature that the ­pleasure in perpetuity might be analogous to pleasure taken in ordinary commodity consumption, it is instead theorised as pleasure in the creation of a legacy, understood as the ability of a donor to project her character and values into the future. It follows from this, as a connected critical claim, that plan-protection can be justified in policy terms. If the motivation to create perpetual foundations is understood as springing from pleasure taken in contemplation of a perpetual legacy, then there is a risk that denying donors perpetuity would reduce the sum of gifts. To focus uniquely on the encouragement of donation as a justification for planprotection would be an incomplete use of the theory. The altruistic side of the binary can be put to work, as a part of a second critical claim that egoistically motivated charity is likely to be of low social utility. This is because an altruistic donor, someone who is motivated by a selfless concern for others, is more likely to apply capital in a manner free from egoistic encumbrances such as Beryl Buck’s locality restriction or idiosyncratic methods of welfare delivery. Thus, it can be said that a legal system containing a plan-protection norm encourages egoistic giving, but that increase in charitable wealth comes at the cost of inefficiency. Foundations that are deeply encumbered by the donor’s egoistic search for legacy will be less efficient than those that are not. The application of donative economics then leads to a final critical claim. At first blush, it might seem that the working through of theory leads only to a Hobson’s choice between the encouragement of egoistic charity and the discouragement of all charity. But the theory can also point the way to a legal compromise. It will be argued that egoistic donors might still be induced to donate with a weaker legal norm than plan-protection in perpetuity. There is no need to provide planprotection forever. A similar policy effect might be brought about by a period of immunity from reform, so that donors should still be induced to create foundations, but after a certain time is up, their charity would face social utility-orientated modification.

II.  Donative Economics and Legal Scholarship Donative economics, as it has emerged in recent decades, contains a focus on egoism which is not widely acknowledged either in legal scholarship or popular perceptions of charity. In non-academic discourse, donors who apply capital to valid charitable goals are often thought to be motivated by an altruistic wish to help others. There is a social perspective, existing far beyond scholarship, which links selflessness with charity. There, charity is much more readily associated with personal sacrifice than egoism. This is a historical and persistent understanding – so John Wesley famously implored people to earn all they can by honest industry, save all they can, and then give all they can of that ‘portion of the Lord’s goods

Regulating Egoism in Perpetuity  57 which he has for the present lodged’ in their hands.14 In a similar spirit but a more modern framing, Ben Witherington writes that charitable activity does not ‘refer to a warm mushy feeling’, but instead derives from ‘sacrificial action’.15 Contemporary fundraising methods such as marathons and sponsored sleep-outs key into this same social understanding of charity, linking it – at least symbolically – with suffering or selflessness.16 Reflecting the general discourse, legal scholarship similarly omits egoistic self-benefit in gifts. A paradigmatic example of the legal view of egoism links the concept with the world of commerce rather than charity. Melvin Eisenberg famously draws a theoretical distinction between non-enforceable gift-promises and enforceable contracts,17 which is built upon an interpretation of gifts as being motivated by feelings akin to family selflessness. Eisenberg presents reciprocal, self-benefitting arrangements as belonging to a world of exchange – ie egoistic transactions in business.18 By contrast, gift-promises are said to lie in our affective impulses towards our better emotions – ‘love, friendship, affection and the like’.19 While this emotion and family-driven frame does not directly exclude the possibility that gift-promises might be motivated by non-altruistic impulses, the character and nature of donation is impliedly selfless and juxtaposed against commerce. However, this linking of gifts and selflessness in both legal and public dis­­ courses is challenged by contemporary donative economics, which very directly connects egoism with giving of all types. James Andreoni’s now well-known egoistic argument takes the form of a logical case;20 his model is that if end-driven, economically altruistic motivation were to be treated as the sole cause of donation, then free-riding on the generosity of others should in that frame lead to low levels of overall giving. If all donors were motivated entirely by the achievement of altruistic material ends, then they would not be motivated to donate in circumstances where someone else is prepared to provide them.21 Founders would sit back and allow others to do the work. So, Andreoni’s argument for the existence of egoism in giving rests on the elegant empirical observation that charitable crowding out is rare. It would be difficult to overstate the social scientific impact of the egoistic perspective. There is now a substantial branch of experimental literature that is applying and testing variants of Andreoni’s theory of motivation in relation to 14 A Outler and R Heitzenrater, John Wesley’s Sermons: An Anthology (Nashville, Abingdon Press, 1991) 355. 15 B Witherington III, John’s Wisdom, A Commentary of the Fourth Gospel (Louisville, Westminster John Knox Press, 1995) 247–8. 16 See, eg, C Olivola and E Shafir, ‘The Martyrdom Effect: When Pain and Effort Increase Prosocial Contributions’ (2011) 26 Journal of Behavioural Decision Making 91. 17 M Eisenberg, ‘The World of Contract and the World of Gift’ (1997) 85 California Law Review 821. 18 See also M Chen-Wishart, ‘In Defence of Consideration’ 13 Oxford University Commonwealth Law Journal 209, 223. 19 Eisenberg, ‘World of Contract’ (n 17) 848. 20 Andreoni, ‘Impure Altruism’ (n 12). 21 See, eg, B Kingma, ‘Public Good Theories of the Non-Profit Sector’ (1997) (n 13) 139.

58  John Picton crowding out.22 There is also a stream of applied fundraising technique which seeks to present public charitable goals as private and individually achievable goods, such as building a particular well, or feeding an identifiable farm animal.23 The theory, as it is turned to practice, is that by particularising a fundraising goal, individuals feel that they can solve a social problem alone, and so the charitable drive is not crowded out. A different research-informed fundraising technique focuses directly on egoism and material self-benefit, so that fundraisers regularly provide incentives for donors,24 building rewarding ‘relationships’ over time, or directly incentivising donors with material benefits, such as freebies, prizes and lotteries.25 Given its social science influence, it is surprising that donative economics, in the vein developed by Andreoni, has not yet been worked through in charity law research. One potential explanation is perhaps that its focus on pleasure in self-benefit might be thought to jar with the spirit of the wider legal project as it relates to charity. Egoistic theory might be interpreted as alien to the main questions of scholarship as it currently exists, which analyse charity law rules as a type of state-backed regulation of beneficial human behaviour.26 There is little space for subjective egoism in such a frame. Another contemporary impediment is that altruism, at least understood as a type of public spiritedness, is a key state public policy interest, and that much legal scholarship reflects and investigates contemporaneous state policy concerns. So, for example, Tina Stowell, the Chair of the Charity Commission, has publicly elaborated a conceptual policy alignment between charity and altruism, taking the view that when citizens donate, ‘we give to something that is … important and precious: the charitable instinct itself ’.27 Much practical policy analysis of charity can be understood as a search for ­methods to harness or encourage that spirit.28 In turn, a certain vein of scholarship 22 See, eg, W Harbaugh, ‘The Prestige Motive’ (n 12). C Landry et al, ‘Towards an Understanding of the Economics of Charity’ (2006) 121 The Quarterly Journal of Economics 747; A Buraschi and F  Cornelli, ‘Donations’ (2002) CEPR discussion paper 3488; W Lindahl, Principles of Fundraising: Theory and Practice (Boston, Jones & Bartlett, 2010) 98. 23 See, eg, J Hughes, ‘Beyond the Rattling Tin’ in C Hanvey and T Philpot (eds), Sweet Charity: The Role and Workings of Voluntary Organizations (London, Routledge, 1996) 173; N Eliasoph, The Politics of Volunteering (Cambridge, Polity Press, 2013) 160. 24 Cases where freebies have been so extensive that tribunals have consider whether or not they amount to consideration: Serpentine Trust Limited v HMRC [2014] UKFTT 876 (TC); Friends of the Earth v HMRC [2016] UKFTT 0411 (TC). 25 See, eg, M Worth, Fundraising: Principles and Practice (Thousand Oaks, SAGE, 2016) 309–314. 26 See, eg, R Atkinson, ‘Altruism in Nonprofit Organizations’ (1990) 31 Boston College Law Review 501, 599. A sophisticated analysis of altruism in relation to charity law is also found in M Turnour, ‘Modernising Charity Law: Steps to an Alternative Architecture for Common Law Jurisprudence’ in M McGregor-Lowndes and K O’Halloran (eds), Modernising Charity Law: Recent Developments and Future Directions (Cheltenham, Edward Elgar, 2010) 228. 27 T Stowell, ‘Chair’s Speech’ (Speech at Charity Commission Annual Public Meeting, Manchester, 2019) www.gov.uk/government/speeches/chairs-speech-to-the-charity-commission-annual-public-meeting. 28 See, eg, S Moody, ‘Policing the Voluntary Sector: Legal Issues and Volunteer Vetting’ in A Dunn (ed), The Voluntary Sector, the State and the Law (Oxford, Hart, 2000) 39; C Mitchell, ‘Reviewing the Register’ in C Mitchell and S Moody (eds), Foundations of Charity (Oxford, Hart, 2000) 175.

Regulating Egoism in Perpetuity  59 becomes a ‘friend’ of the state’s altruistic cause – a project intended to facilitate its social goals. It should be conceded that it is natural to look for altruism in charity. The drive can be understood as at least a critical starting point for delineating charity scholarship from the private law disciplines which – with the possible exception of family law – seldom claim, at the level of ethics, to be more than systems for the settlement of self-interested disputes. But it is also necessary for charity law scholarship to peer across to the egoistic side of the theoretical binary. There is more to charity regulation than public-spiritedness and codified goodness. As it will be seen, acknowledgement of egoism has far-reaching regulatory consequences. To  obscure it from analysis is to omit a prime driver in charitable giving, and, in turn, to miss an impulse which flavours policy reality. An analytical working through of egoistic theory, as drawn from donative economics, marks that point in this chapter. Theorising the perpetual foundation as an egoistically shaped legal form, a legal entity which provides donors with pleasure in self-benefit, begs regulatory questions. Acknowledgement of egoism in perpetuity opens up a space in which it becomes possible to interrogate the terms on which donors should be permitted their self-regarding enjoyment in the creation of a charity in the first place. Or, put another way, it puts donors on the back-foot. Given their pleasuredriven desire to establish perpetual foundations, the law can be understood as being in a strong position to make regulatory demands upon them. Understanding the drive to establish a perpetual foundation as egoistic also raises policy questions about the social effect of that fundamental legal form. This is shown by the argument developed in this chapter – that organisations created in an altruistic spirit are likely to be of higher social utility than those founded in pursuit of a perpetual egoistic legacy, and, in turn, that state-driven reform of foundations – ie the ability of a court, normally acting at the behest of trustees, to alter the purposes of a foundation – is socially useful.

III.  Theorising Egoism in Connection with Legal Perpetuity This section develops a theory on the motivation to establish a perpetual foundation, characterising it as an egoistic drive. It is seen that the desire to create a foundation might be drawn from the legal possibility of perpetuity, where that ability is perceived as a self-benefit by the founder. Rejecting a view drawn from the literature that pleasure in perpetuity might be understood as analogous to ordinary commodity consumption, it is instead argued that the egoistic motivation in perpetuity is best conceptualised as a social desire, held by the donor, to project her character and values into the future after death – ie a desire for legacy. At first blush, a possible theoretical analogy between the pleasurable consumption of legal perpetuity and legally created commodities might seem attractive.

60  John Picton It is a position suggested by existing experimental research into egoism, which strongly links charitable giving and commodity consumption. The law is able to create commodities, such as prize tickets, entirely from within its own structures. The perpetually existing foundation could be understood as a market good of a parallel type, something which is ‘bought’ and consumed by the donor in pursuit of pleasure. It is certainly true that a strand of contemporary egoistic theory investigates the impulse to charity through that commodity consumption frame. To this end, Craig Landry et al show that lottery fundraising, which holds out the prospect of a ­windfall for donors, increases charitable giving.29 Similarly, in a study of records at the English National Opera, Andrea Buraschi and Francesca Cornelli find that certain donors are influenced by the prospect of marketised extras, such as access to gala dinners.30 A connection between the consumption of market goods and egoistic motivation can also be seen from the case law, being most clearly evidenced in public appeals, where inducements are offered in order to bring about donation. In one instance, Re West Sussex Constabulary’s Widows, Children and Benevolent Fund, a case involving an appeal in which the donors were promised direct ­material goods in return for giving, Goff J stated precisely: ‘The purchaser of a ticket may have the motive of aiding the cause or he may not; he may purchase a ticket merely because he wishes to attend the particular entertainment or to try for the prize.’31 In this analysis, Goff J comes very close to recognising the same commodity concept of charitable egoism as that which appears in experimental research. The judge acknowledges that donors might give for pleasure in material goods ­incidental to altruism. This frame directly links an egoistic market activity – paying in exchange for something – with the act of egoistic giving. With reference to this research literature, it is tempting to directly extend the same egoistic logic to the establishment of the perpetual charitable foundation. On such a view, ‘the perpetual charitable foundation’ might be understood as a type of law-created commodity, or something that the donor ‘gets’ in exchange for donation. So just as a donor might receive material benefits from giving, such as fundraising inducements and membership passes, then ‘legal perpetuity’ could be understood in the same way. The donor could be interpreted as pleasurably consuming legal perpetuity as a commodified self-benefit, just as if it were a seat at a gala dinner. One initial objection to transferring the commodity frame as it exists in the literature directly across to the context of legal perpetuity is that the subjective experience of establishing a foundation is substantively very different from the pleasurable consumption of fundraising benefits. Inducements to give are normally intangible and fleeting, whereas the creation of a perpetual charity

29 C

Landry et al, ‘Towards an Understanding of the Economics of Charity’ (n 22). and Cornelli, ‘Donations’ (n 22). 31 Re West Sussex Constabulary’s Widows, Children and Benevolent Fund [1971] Ch 1 (Ch) 11. 30 Buraschi

Regulating Egoism in Perpetuity  61 requires long-term involvement and commitment. Goff J was referring to such ephemera as tickets and prizes, and in a different judgment, Lord Denning has described fundraising activity as comprising of ‘a flag day, a whist drive, a dance, or some such activity’.32 By contrast, a donor taking pleasure in the creation of a foundation can expect fewer immediate rewards. Her legal experience is inherently long-term, future-looking and intangible. If there is an egoistic pleasure in achieving perpetual charity through law, it must be of a disciplined sort distinct from immediate consumption. In order to meet this objection, the commodity frame might be extended. While accepting that legal perpetuity is something experiential and long-term, one potential parallel for the pleasure taken in establishment of a perpetual foundation might be the purchase of a sport season ticket – ie a long-term consumer experience, where the pleasure lies in future anticipation of the matches rather than the purchase of the ticket itself.33 A more complex linking, in the light of the fact that foundations do inevitably take a physical or ‘bricks and mortar’ form, might be to relate the establishment of a perpetual foundation with the pleasure found in the consumption of quasi-physical commodities, such as DVD box sets or computer game cartridges. There, physical consumption is combined with experiential consumption.34 Viewed in these terms, the commodity analogy can be broadened, at least at the level of theory. The donor, in establishing a perpetual foundation, could be understood as taking a long-lasting anticipatory and experiential enjoyment in the consumption of legal perpetuity – and that pleasure could be termed as the egoistic drive to perpetual charity. However, the analogy ultimately simplifies too much to be workable without artificiality. A key distinction between the establishment of a perpetual foundation and the purchase of a market good is that the legal creation of a perpetual charity is a socially significant act. The core rationale behind the establishment of a foundation is to affect society, and so to separate out the motivation behind perpetuity from a desire to impact upon the world is inevitably to remove an important conceptual element from the picture. As such, a comparison with the purchase of a DVD or a sports ticket is ultimately lacking. While ordinary commodity consumption is a decision impacting primarily on the consuming individual, the creation of a perpetual foundation is, by definition, a type of consumption with far-reaching implications for others. Thus, a more sophisticated understanding of the drive to perpetuity must account for its social aspect. A link between social acclaim and egoistic donation is present in the research literature. James Andreoni and Ragan Petri show that where donors are identifiable, the size of their in-study donation will increase. In  experimental studies, they find that ‘by unmasking subjects, we allow for 32 Re Hillier’s Trusts [1954] 1 WLR 700, 714 (CA). 33 M Morgan and J Summers, Sports Marketing (London, Thomson, 2005) 138. 34 See T Carter, ‘The Psychological Science of Spending Money’ in E Bijleveld and H Aarts (eds), The Psychological Science of Money (London, Springer, 2014) 228.

62  John Picton v­ arious social effects, like pride, shame, social comparison and prestige, to work’.35 A very direct example of egoistic gifts motivated by a social reward is found in the phenomenon of charity auctions, where donors are encouraged to make donations which are both public and prominent in a context of positive social recognition.36 On a smaller scale, this category of public giving is familiar to many of us, arising in run-of-the-mill social interactions, such as workplace collections.37 In a sophisticated review of rich data in historic wills, Leslie McGranahan finds that ‘individuals give in part to influence how they will be perceived’, and that they may be ‘motivated by the desire to garner the approval and approbation of others’.38 As such, his analysis identifies, as recorded in testamentary documents, an egoistic drive to bequeath located in the good opinion of the community. The logic of McGranahan’s study is that the impulse to donate to charity is the same as that present at a charity auction or a whip-round at work. He understands the testators as being motivated by social acclaim. By emphasising a non-market understanding of egoism, McGranahan points in the correct direction, but the social context of the research – legacies on death – suggests more than he is able to take from it. To conceptualise the egoistic drive behind legal perpetuity, it is necessary to broaden the source of satisfaction in giving. While McGranahan is right to identify egoism in the historic English wills, his square focus on social acclaim side-steps an analysis of something apparent in his own data – legacy. That is ultimately a drive which goes deeper than the good opinion of the community. Legacy allows people to project their personality and their values into the future. It enables them to influence others and to shape the world after their death. Legacy is not solely about property transfer, but also about values. So, in the Jewish tradition of legacy letters, the deceased might present a story of their life as well as ethical advice to later generations. There, the motivation is to help descendants, but also to provide solace to the author in contemplation of death.39 The motivation to establish a foundation is often a manifestation of this widely shared drive to project character and values into a future after death. It is often an egoistic drive because the pleasure comes from the anticipation of that projection, rather than the material consumption of others. And so, investigating the concept of legacy, Elizabeth Hunter and Graham Rowles find that the passing-on

35 J Andreoni and R Petrie, ‘Public Goods Experiments Without Confidentiality: A Glimpse into Fund-Raising’ (2004) 88 Journal of Public Economics 1605, 1620. 36 See, eg, Harbaugh (n 12); Andreoni and Petrie, ‘Public Goods Experiments Without ­Confidentiality’ (n 35). 37 See, eg, E Barman, Contesting Communities: The Transformation of Workplace Charity (Stanford, Stanford University Press, 2006). 38 L McGranahan, ‘Charity and the Bequest Motive: Evidence for Seventeenth-Century Wills’ (2013) 6 Journal of Political Economy 1270, 1289. 39 See, eg, J Riemer and N Stampfer, Ethical Wills and How to Prepare Them: A Guide to Sharing Values from Generation to Generation (Woodstock, Jewish Lights Publishing, 2015).

Regulating Egoism in Perpetuity  63 of values is a particularly powerful impulse amongst interviewees.40 In later work, they find that ‘a primary task in creating a legacy is determining the values we cherish most in life and conveying these values to our descendants and to our communities.’41 Founders build social monuments to themselves. Another way of understanding the same concept is in terms of ‘post-mortem identity’ or securing remembrance.42 This drive to egoistic remembrance links to foundation-creation. It is strikingly explicit in Protecting Donor Intent: How to Define and Safeguard Your Philanthropic Principles,43 a guide for founders concerned that their capital might be applied to causes of which they disapprove. There, Jeffrey Cain sets out a checklist that selfprojecting donors might ask themselves, including an assessment of their religious values and ‘the ideas, traditions, persons, events, and circumstances’ that shaped them as a person.44 Cain suggests that donors might create legacy statements, alongside ‘other collateral material intended to convey the character, passions, goals and ideas of their founder to future generations’.45 He goes so far as to detail one foundation with interactive foyer kiosks explaining the life, values and beliefs of the founder.46 A theoretical focus on legacy enables a different understanding of the egoistic drive to legal perpetuity. It enables the establishment of a perpetual charitable foundation to be understood as a way of achieving a lasting impact after death. Such a view of charitable perpetuity has – obliquely at least – been recognised in the courts; in Re Weir Hospital,47 Farwell LJ stated his view that ‘one of the strongest inducements to gifts of this nature is that desire for posthumous remembrance which has inspired similar gifts for centuries’.48 And a darker acknowledgement of the drive to project personality into the future also occurs in judicial comments relating to the interpretation of the donor’s wishes after death. In Re Woodhams, Vinelott J referred to donor intention as a ‘will o’ the wisp’,49 linking the donor’s perpetual wishes to an ephemeral and atmospheric ghost. In the same vein, in Harwood v Harwood, Week J referred ironically to the task as ‘divination’.50

40 E Hunter and M Rowles, ‘Leaving a Legacy: Toward a Typology’ (2005) 19 Journal of Aging Studies 327. 41 E Hunter and M Rowles, ‘Beyond Death: Inheriting the Past and Giving to the Future, ­Transmitting the Legacy of One’s Self ’ (2008) 56 OMEGA 313, 322. 42 SE James, Women’s Voices in Tudor Wills 1485–1603: Authority, Influence and Material Culture (Oxford, Routledge, 2016) 2. 43 J Cain, Protecting Donor Intent: How to Define and Safeguard Your Philanthropic Principles (The Philanthropy Roundtable, 2012). 44 Ibid, 16. 45 Ibid, 19. 46 Ibid, 20. 47 Re Weir Hospital [1910] 2 Ch 124 (CA). 48 Ibid, 138. 49 Re Woodhams [1981] 1 WLR 493 (Ch) 502. 50 Harwood v Harwood [2005] EWHC 3019 (Ch) [25].

64  John Picton In place of understanding the pleasure in perpetuity through a pleasure in commodity consumption frame, or even as a mere striving for social acclaim, it can be interpreted as a means for the donor’s self-projection after death. The remarkable case of M’Caig v University of Glasgow51 illustrates this point. In that instance, a landowner in Oban, the last male in his line, attempted to establish a foundation in which his estate rental would be perpetually devoted to the continual and ­ongoing erection of (seemingly numberless) statues of himself in prominent places. The landowner further directed that statues of himself and his family should be placed atop a colossal circular tower that he already built in Oban. The circumstances of the gift were too much for the court, and so the Lord Justice Clerk stated with candidness that ‘[the donor] seems to have been possessed of an inordinate vanity as regards himself and his relatives, so extreme as to amount almost to a moral disease’.52 But looking beyond the condemnatory tone of the judge and his policybased rejection of the peculiar enterprise, it is possible to understand the case as only an extreme example of a motivation which is often acceptable. The donor, in attempting to build numberless statues of himself, should be interpreted as acting within the scope of an egoistic spirit that motivates many founders in search of self-projection. This does not mean that foundation-creation is an entirely egoistic project. It is crucial to emphasise that while donative economics provides a binary model, it is possible for donors to derive simultaneous pleasure in motivations on both sides of the altruistic/egoistic divide. The well-known circumstances of the Barnes Foundation,53 as much litigated as it is celebrated, illustrates that point. Arthur Barnes, amassing capital in pharmaceuticals and selling out immediately before the stock market crash of 1929, had put together a collection of art of comparable quality to that of the great galleries of the world, including 181 paintings by Renoir and 69 by Cézanne. Creating a foundation to house his masterpieces worth many billions of dollars, and naming the institution after himself, he sought to lock a personal vision into a strictly unchangeable charitable constitution. The collection was to be free for ‘plain people’; the art was to be hung precisely as he left it; the gallery was to be located in the quiet Philadelphia suburb of Merion, where Barnes had lived. In consequence of zoning regulation, it was subject to daily visitor limits. Beyond even that, it was only to open to the public for two days a week. Viewed through the prism of a link between egoism and perpetuity, the Barnes Foundation – an organisation where a very personal institutional vision was foregrounded – carries the hallmarks of egoistic legacy, or a pleasure in giving derived from the self-projection of the character and values of the donor after death. In this regard, it is comparable with the plainer statue-building egoism

51 M’Caig v University of Glasgow (1906) 14 SLT 600. 52 Ibid, 602. 53 H Schweizer, ‘Settlor’s Intent v Trustee’s Will: The Barnes Foundation Case’ (2005) 29 Columbia Journal of Law & the Arts 63; S Gary, ‘The Problems with Donor Intent’ (n 7) 985.

Regulating Egoism in Perpetuity  65 in M’Caig. But it would also be wrong to say that an altruistic motivation did not simultaneously run through the gift. As Heinreich Schweizer notes,54 the scheme is comprehensible as a good faith attempt to achieve education in art for the benefit of others, rather than to create a mass-access gallery. As such, Barnes can be understood as exhibiting a mix of altruistic and egoistic motivation, albeit through a means where the latter crowded out the former. The fresh understanding of the drive to perpetuity, as developed here – that it aligns with a complex desire to project character and values into the future after death – is more sophisticated than the commodity analogy suggested by the experimental literature. It explains more deeply what the donor ‘gets’ by way of a self-benefit when creating a foundation. The drive to create a perpetual foundation is a type of egoism, motivated by the desire to create legacy.

IV.  A Justification for Founder Plan-Protection Legal perpetuity requires a commitment from the legal system to protect the donor’s plans – ie for courts to refrain from altering them even as time passes. It is not at all obvious that the law should provide this plan-protection. Where it exists, it is an extraordinarily significant legal commitment, leaving property inalienable for the duration of the legal system. This section argues that while the donor is not ‘owed’ any obligation by the law, plan-protection in perpetuity can still be justified as a way of incentivising donation by harnessing the egoistic drive to self-project to encourage donation to legally recognised charitable purposes. If plan-protection were to be justified as an obligation owed by the law, the founder might be cast as a party to an obligation-generating deal. That arrangement could be expressed as an duty owed to the donor in return for her ‘gift’ of capital. Such a view is seen at least implicitly in certain judicial statements; in Re Weir Hospital,55 Farwell LJ said directly that the court was ‘bound to carry … intention into effect’.56 And in Philpott v Saint George’s Hospital,57 Sir John Romilly MR said: ‘instances of charities of the most useless description have come before the Court, but which it has considered itself bound to carry into effect’.58 It can be countered that it is artificial to conceptualise the donor as entering into an obligation-generating relationship with ‘the law’. There is an immediate and plain sense in which this is true; the law, as a body of rules regulating the perpetual foundation, cannot owe a duty as it has no agency to do so. However, the claim that ‘the law’ owes the donor plan-protection can be fleshed out into a claim that some group or body is, at least in a theoretical sense, bound to the donor.

54 Ibid,

67. (n 47). 56 Ibid, 135. 57 Philpott v Saint George’s Hospital (1859) 27 Beav 107. 58 Ibid, [112]. 55 Weir

66  John Picton Such a view can be found in the literature. So, Alex Johnson states directly that ‘the settlor who establishes a charitable trust is viewed as entering in to a contract with the public’.59 It is, then, theoretically viable to say that the general public owes the donor an obligation and that the law carries this through on her behalf. According to that rationale, the judicial statements to the effect that the ‘law’ has a duty of planprotection are effectively the same as saying that the ‘public’ have such a duty. In a related vein, Mehmet Bac assesses whether a reciprocal obligation could be owed by the charitable ‘trust’.60 Being an organisation established formally for the public benefit, this perspective elides with that of Alex Johnson, as the ‘public’ could be said to be represented by the charitable trust through the class of people that the foundation, as a matter of fact, benefits. In this manner, it is possible to theorise a justification for plan-protection through the frame of a duty owed by the public, whereby the law, as a representative of that public, is under an obligation to protect the donor’s plans. Yet the obligation-based justification miscasts the relationship of the donor to the law. When the enormous normative strength and significance of planprotection in perpetuity is considered, it is evident that the donor brings nothing to the negotiating table, other than a request for a privilege. Plan-protection is something that many donors positively want, as it provides them with an egoistic self-benefit. While the law might choose to carry through a desire of the donor, it is not realistic to conceive the law as being bound to do so. It is rather that the law is performing a favour for the founder, providing her with something that she could not otherwise have. As it is not normally possible to have a duty to perform a favour, it is wrong to frame the one-sided facilitation of a person’s desires in terms of carrying out an obligation. The scale of the favour accorded by plan-protection is apparent in all circumstances where charitable foundations endure for a long period, but its magnitude is thrown into relief where the donor’s original plans have become low-utility. So, in one striking example, Attorney General v The Earl of Craven,61 a gift that had been made both for the reception of plague patients and to provide them with a burying-place and a pest-house was preserved until at least the nineteenth century, despite the very low likelihood of the plague recurring. To be able to lock up capital to low-utility purposes for a very long period is an extraordinary privilege. It is a long-term commitment from the legal system to carry through the founder’s wishes even as the world changes around them. Attention to egoism in donative economics helps point the way to a justification for plan-protection based in policy rather than obligation. As many donors 59 A Johnson Jr, ‘Limiting Dead Hand Control of Charitable Trusts: Expanding the Use of the Cy Pres Doctrine’ (1999) 21 University of Hawaii Law Review 353, 357. 60 M Bac, ‘Restricted Charitable Donations and the “Cy Pres” Doctrine’ (2002) 14 European Journal of Law and Economics 15, 16. 61 Attorney General v The Earl of Craven (1856) 21 Beav 392.

Regulating Egoism in Perpetuity  67 ­ ositively wish to project their character and values into the future, plan-protection p might be understood as a policy technique to amplify that drive, rather than something which is owed. It can be interpreted as a policy tool to encourage donation. So, a founder with knowledge of an existing legal norm to protect the constitution of her charity will be better incentivised to establish the foundation in the first place. While the law cannot be said to owe the donor plan-protection, there is still a potential policy justification in incentivising donors to transfer capital to ­foundations – favours do not have to be selfless. The view that plan-protection encourages giving can be found elsewhere. Most directly, Eric Pearson argues for a restrictive approach to the modification of established charitable trusts. He does so on the basis that a parsimonious legal reform-test, where only charities which cannot reasonably function should be able to modify their established purposes, would increase the net sum of funds in charity.62 Reinterpreting this view through a theoretical frame, Pearson’s position might be construed as being that a donor might, taking an egoistic pleasure in the prospect of a projection of their own character and values, and being assured that her plans are uniquely protected from alteration, become a charitable founder for exactly that reason. Pearson’s point can be brought out through Re Weir Hospital.63 In that case, a donor named Benjamin Weir had left his house in Streatham, as well as a considerable amount of other capital, as a site for a medical facility. His personality was very clearly impressed upon the foundation. Not only was the hospital to be located in his former home, but he also directed that the institution should bear his name, and that his portrait, as well as pictures worked by his daughter, should be hung in the board room. He futher directed that the boardroom was to be kept in good order.64 Despite all this, the Charity Commissioners took the view that Benjamin Weir’s funds could be more usefully spent by applying the money to a general hospital relatively nearby, and sought to direct much of the capital to that higher utility cause. Proceeding in a manner which would be in sympathy with egoistic theory, the Court of Appeal resisted any alteration by the Commissioners and insisted that the donor’s plans be precisely followed. Each of the judges said that the plans of donors should be protected unless it was impossible to follow them. Farwell J said precisely that: ‘no doubt should be cast on the permanency and security of bequests’,65 so that donors would continue to give in future. So, the judge assumed a legal norm protecting Benjamin Weir’s plans would have been, at least in part, what caused him to leave his house as a charity and establish a medical facility in his name. The judge was likely correct. It is clear from the care taken by B ­ enjamin 62 E Pearson, ‘Reforming the Reform of the Cy Pres Doctrine: A Proposal to Protect Testator Intent’ (2006) 90 Marquette Law Review 127, 149. 63 Weir (n 47). 64 Ibid, 125. 65 Ibid, 138.

68  John Picton Weir to link his personality to the character of the foundation that egoism informed his motivation to donate. At first sight, there appears a possible objection to the judicial policy position in Re Weir Hospital. Even accepting, on the basis of theory, that plan-protection encourages the creation of foundations, it could be said that the law should not, as a matter of policy, care too much about the choices of Benjamin Weir and his ilk. This is because there are perhaps alternative and more socially beneficial uses for his capital other than voluntary charity, particularly after it is accepted that perpetual foundations have a tendency towards egoism. Most obviously, the state might take a proportion of his capital on death, so as to expend it in a manner accountable to the political process. Not only does the tax mechanism iron away the egoism of individuals, it also brings capital under collective control, so that the democracy might be able to provide for itself. It is increasingly said that wealthy philanthropists should pay more tax,66 and in circumstances where large amounts of capital are increasingly accumulating in the hands of a small number of individuals,67 that is a thought unlikely to fall from public consciousness. However, regardless of the merits of that widely held position, it would be wrong to think of this normative claim as being in any straightforward tension with a pro-donation policy at law. The two positions – that capital should be more intensively taxed and that the law should encourage donation – are not ordinarily in conflict. There is no capitalism in the world with a 100 per cent tax rate, as all polities leave some discretion to individual expenditure in both life and after death. And it is only that totalising circumstance where the state takes all or nearly all of the capital of an erstwhile donor that taxation could be understood as making a pro-donation policy redundant. Put differently, unless or until state political economy is very much changed, there remains a policy imperative in favour of the encouragement of donation. This is because discretionary wealth will persist as a matter of fact. Admitting that these political circumstances are contingent does not weaken the importance of pro-donation policy so long as they persist. So long as potential founders have discretionary control over their wealth, the law has a social interest in plan-protection. It is a mechanism to encourage donation. However, this is a policy choice of the law, not any type of duty. All the cards are stacked in the hands of the legal system which provides plan-protection. So as to facilitate the donor’s plans, the law must give an extraordinarily long-term commitment. Even so, there remains possible policy advantage in encouraging donation to charitable purposes – it is an incentivising tool.

66 See, eg, A Giridharadas, Winners Take All: The Elite Charade of Changing the World (New York, Knopf, 2018) 262; D Callahan, The Givers: Wealth Power and Philanthropy in a New Gilded Age (New York, Knopf, 2017) 299. 67 See, famously, T Piketty, Capital in the Twenty-First Century (Cambridge, Harvard University Press, 2014); J Stiglitz, The Price of Inequality (London, Penguin, 2013).

Regulating Egoism in Perpetuity  69

V.  An Analytical Role for Altruism Even if plan-protection encourages giving, there remains analytical space for the consideration of countervailing policy concerns. It is seen in this section that planprotection also causes a policy problem; it encourages low-utility giving. That point is made through comparative attention to altruism, understood as a pleasure taken in the material benefit of others. Altruistically motivated gifts will not be encumbered with the donor’s egoistic self-projection, and in consequence, they are likely of a higher social utility than their primarily egoistic counter-parts. In turn, it can be said that – insofar as it encourages egoistic giving – plan-protection causes the existence of low-utility charitable foundations. The connection between egoistic charitable motivation and low social utility is not widely accepted. So, Pearson argues not only that the plans of donors should be protected in perpetuity, but also, in particular, that low-utility organisations should not be readily reformed. For Pearson, charities which are merely low-utility  – or, as he puts it, ‘wasteful’ – should be proactively protected from any alteration by charity law.68 Within this frame, it could be said that while lowutility charities are unfortunate, perpetual plan-protection remains necessary to incentivise foundation-creation, and wasteful organisations are an incidental cost, a price worth paying so as to create a legal environment in which the overall sum of gifts in charity is maximised. Yet the view that wastefulness is an incidental but acceptable cost of planprotection assumes that the phenomenon of low charitable utility is a free-standing occurrence: something which is not inherently caused by the law, but is instead independent of it. It imagines waste as distinct and unconnected from the policy of plan-protection. With attention to donative economics, it can be seen that lowsocial-utility charity and perpetual plan-protection are causally linked. While it is true that perpetual plan-protection can be said to encourage donation to charitable purposes, to focus on that point alone, as Pearson does, is to miss a deeper analysis of a directly associated cost. Perpetual plan-protection also creates a policy problem because it actively encourages waste. The causal link between plan-protection and waste is neither obvious nor ­intuitive. One potential method for its explication is straightforwardly ­empirical – to collate examples of low-utility as they exist in long-protected perpetual foundations. This has the effect of highlighting, through illustrations, the character and extent of low-utility charity, and then, from the evidence in the catalogue, a link between waste and plan-protection can be drawn out. This broadly marks the method of William Beveridge in Voluntary Action: A Report on Methods of Social Advance, where he reviewed examples, in a ‘Chamber of Horrors’,69 of wastefulness over time, so linking the problem of low-utility with perpetual plan-protection. 68 Pearson, ‘Reforming the Reform’ (n 62) 128. 69 W Beveridge, Voluntary Action: A Report on Methods of Social Advance (Woking, Unwin, 1948) 356.

70  John Picton As a method to draw out an inherent connection between plan-protection and low charitable utility, recording and reviewing instances of waste is inevitably analytically limited. It brings little to the conceptual stall. Although the approach has a rhetorical or persuasive force, it relies upon a pre-existing and shared understanding of what charitable waste might look like. In the light of this, it must be admitted that some examples are so marked that wastefulness is difficult to deny – such as Pursglove School, where the curriculum was entirely restricted to Latin subjects,70 and Tancred Hospital, which was described as wretched and subject to scandals.71 But ultimately, Beveridge’s approach provides only examples of ­charitable waste in place of a theoretical explanation of it. It is through direct regard to the nature of economic altruism that a structural link between plan-protection and low-utility charity can be found. It will be remembered that altruistic gifts are those which are genuinely motivated by the material benefit of others rather than self-benefit. In altruistic gifts, it is more likely that the benefits of the transfer will accrue to others, because the donor is not herself benefitting. And so higher social utility is inherent to the altruistic motivation. In the contemporary era, a significant school of economically informed analysis of altruism has developed which deploys the altruistic side of the e­ goistic/altruistic binary as a critical tool, or a mechanism to divide between ‘useful’ and ‘low-utility’ charity. Most famously, Peter Singer presents a sustained case in favour of deliberative and careful giving, where through consistent appraisal, donors might assess the material effectiveness of their gifts.72 The logic of Singer’s economic altruism is calculative and so utility-orientated. Donors are encouraged to identify areas of the most acute social need and, following that assessment, direct capital where it will be the most impactful.73 The method of giving – in which donors are in effect encouraged to rationally remove the traces of their egoistic personality from the gift – is intended to maximise social welfare. So, in Strangers Drowning,74 through reportage, Larissa MacFarquhar details the life of a donor whose altruistic concern with others is witnessed through a serious and constant assessment of charitable effectiveness. She researches intensively how her money can be best spent, and, anxious to prolong the lives of others, donates for the provision of bed-nets in low-income countries. Unconcerned with egoistic self-projection, she removes egoistic self-projection from her charitable giving. The consequence, which is the main thrust of Singer’s theoretical mission, is to create a type of donation which is maximally socially useful. 70 Ibid, 367. 71 Ibid, 375. 72 P Singer, The Most Good You Can Do: How Effective Altruism Is Changing Ideas About Living ­Ethically (London, Yale University Press, 2015) 117. In the legal context and from a Liberal perspective, a sophisticated working through of the role of altruism in Charity Law can be found in M Harding, Charity Law and the Liberal State (Cambridge, Cambridge University Press, 2014) 89. 73 P Singer, ‘Famine, Affluence, Morality’ (1972) 1 Philosophy & Public Affairs 229. 74 L MacFarquhar, Strangers Drowning: Voyages to the Brink of Moral Extremity (St Ives, Penguin, 2016).

Regulating Egoism in Perpetuity  71 In Strangers Drowning, MacFarquhar’s selfless and altruistic donor gives privately in pursuit of well-researched objectives, and without establishing any foundation in her name. However, certain altruistic founders might establish new organisations in a spirit of social utility. Famously, GiveWell, in a direct deployment of Singer’s ethical frame, ranks foundations on the basis of their social impact. It lists organisations taking a calculative and scientific approach to capital transfer, with a focus on maximally cost-effective medical interventions. Some take the name of original founders, such as Helen Keller International, which supports vitamin A supplementation to inhibit child mortality. Similarly, the Carter Center, taking the name of the former US President, operates a de-worming programme, informed by utility-based research. All are careful to avoid wasteful expenditure, focusing systematically on need. The analytical point that should be drawn from the emergence of these of utility-orientated and streamlined organisations, is not, without more, an endorsement of Singer’s all-encompassing and calculative view of charity. It is instead the plainer empirical lesson that economically altruistic foundations – those which are orientated around a genuine concern for the charitable consumption of others – will tend towards increased social utility. The egoistic self-projection of the donor is a hindrance on that social utility, as it diverts funds away from core charitable concerns, most notably the relief of need. Equipped with the insight that altruism, as a motivating force, tends to higher social utility, it is possible to work through a theoretical analysis of plan-protection that was not open to Beveridge. In his catalogue of wasteful organisations, he details one Thomas Nash. That donor had attempted, although it appears his foundation foundered, to establish a perpetual charity which would cause muffled bells to be rung out on the anniversary of his wedding day, and for ‘merry mirthful peals’ to sound out on the day of his death.75 It was a malign type of perpetuity that he had in view, as he said his death would mark his release from marriage. It is clear from the scope of his gift, that Thomas Nash was not solely, or perhaps at all, concerned with the ostensible goal behind the enterprise – bell-ringing. Instead, he was motivated by a drive akin to the utilitarian category of ‘pleasures resulting from the view of any pain supposed to be suffered by the beings who may become the objects of malevolence’.76 The case, as described by Beveridge, is so egoistic as to in fact be unusual, but from its extreme aspect, an altruistic critique for plan-protection can be seen in relief. It is clear that without a legal protection for his attempted foundation, there would have been no incentive to attempt to establish it at all. Viewed from within Singer’s framing of altruism, the material good of others was far from the forefront of Thomas Nash’s mind, and the drive to a perpetual projection

75 Beveridge, Voluntary Action (n 69) 375. 76 J Bentham, An Introduction to the Principles of Morals and Legislation (Oxford, Clarendon Press, 1970) 44.

72  John Picton is ­self-evident. Altruistic concern is missing in the donation, but the drive to establish an e­ verlasting and spiteful plan as an egoistic self-projection weighed strongly. The character of a foundation is linked to any egoistic motivation behind the original gift. In consequence, it is possible to draw out a critique of legal plan-protection – ie it is a cause of low-social-utility organisations. In the case of Thomas Nash, a bad perpetual motivation was linked to bad charity. A donor who wishes primarily to project her character and values into the future will tend to create a less socially useful trust than a donor animated by something akin to Singer’s altruism, as that type of altruistic donation requires genuine concern for the material consumption of others. In turn, it can be said that in encouraging the drive to egoistic perpetuity through the legal provision of plan-protection, the law actively encourages low-utility trusts. Charitable waste is not an incident of planprotection, it is instead inherent to it. Regardless of its spitefulness, Thomas’s Nash’s bell-ringing is imbued with an air of historical picturesqueness. However, this will not always be the case. ­Wastefulness, as it connects with the drive to egoistic self-projection, might be more irredeemably malign. This is perhaps clearest where the donor’s egoistic selfprojection is harmful. So, in Dominion Student Hall Trust v Attorney General,77 a case was brought to remove a race restriction to dominion students of European origin from student residences in London. Being called upon to reform the repugnant condition, Evershed J creatively interpreted the donor’s character. He held that the founder had wished primarily to promote community amongst commonwealth subjects, and so found his plans to be broad enough to license a removal of the restriction, which was deemed incidental. While the judge’s reform increased the social utility of the foundation, there is no clear evidence that the restriction was not in fact core to the donor’s egoistic drive, or that he intended anything other than for the bar to remain fixed in perpetuity. In line with analysis developed in this chapter, the foundation can be understood as embodying an egoistic and – in consequence – low-utility attempt to project values into the future. Although there is more than one lens through which to critique the repugnant foundation in Dominion Student Hall Trust v Attorney General, when assessed specifically through the prism of egoistic theory, it is apparent that it lacked economic altruism. The race restriction limited the ability of the trust to materially and effectively better the lives of others. When the charity was reformed – ie when a policy of plan-protection was abandoned – its material usefulness was increased. In effect, the court sought to cast the donor as more economically altruistic in Singer’s sense, deploying the donor’s capital in order to advantage other people in a manner in which the law considered socially useful. It can straightforwardly be said, through the prism of economic altruism, that the court-driven reform improved the charity’s material utility by removing the donor’s egoistic traits.

77 Re

Dominion Students’ Hall Trust v Attorney General [1947] Ch 183 (Ch).

Regulating Egoism in Perpetuity  73 In the previous section, it was possible to draw out a justification for planprotection that did not rely on a duty owed to donors. That justification is located in the encouragement of capital applied to charity. However, it would be limiting to focus on that justification without considering its costs. The view that only absolutely impossible trusts should be alterable relies upon the fact that a legal regime of that type will harness the egoistic drive of donors and so encourage ­philanthropy. Yet it neglects an assessment of the problems inherent to a system which encourages charitable waste. It does not peer across into the altruistic side of the binary to look at what is lost through the adoption of the policy.

VI.  A Legal-Conceptual Method for Policy Compromise It has been seen that there is no legal duty owed to self-projecting founders. There is no obligation to tolerate low-utility. And so, the end point of the theoretical analysis is a policy conflict. On the one hand, plan-protection is justifiable on the basis that it encourages donation. On the other hand, plan-protection leads to the establishment of low-social-utility organisations, encumbered by the donor’s egoisitic self-projection. To accept this as a state of fact would lead to a dilemma between ‘better-funded’ and ‘better-quality’ charity. To avoid that, this section searches for a legal-conceptual compromise, a method to reform organisations in a way which will increase their social utility while still incentivising donors to give. In a sophisticated study of charitable alteration, John Eason proposes an analytical method to reform foundations.78 He presents a reform approach by way of a metaphor in which charitable organisations are presented as a ‘funnel’, with the broadest understandings of charity – ie general purposes such as ‘the relief of poverty’, ‘the advancement of education’, or ‘the advancement of health’ – at the mouth of that funnel.79 A court seeking to reform the gift has only to move partially up the funnel and reshape the gift from the specific to the less specific. Interpreted in the light of egoistic theory, Eason’s funnel method appears to hold out the possibility of a compromise between plan-protection and reform in favour of social utility by keeping the donor’s plans in focus, but simultaneously permitting a judge-led reshaping of the foundation, by whittling away the donor’s egoistic traits. By moving up the funnel (eg from a museum in the donor’s own home to the general promotion of cultural goods), it can be said that the donor’s personality is being progressively removed. There are some circumstances where the method might successfully r­ econcile plan-protection with utility-orientated reform. These are where a relatively 78 J Eason, ‘Motive, Duty and the Management of Restricted Charitable Gifts’ (2010) 45 Wake Forest Law Review 125. 79 Ibid, 153.

74  John Picton minor change might make a big difference to material welfare. Attorney General v Wansay,80 although an historic precedent, appears almost as a lesson in Eason’s method. In that case, a foundation provided annual apprenticeships for two poor boys from a particular Presbyterian congregation from a particular parish, but there was too much in the fund, so causing an unexpended surplus. In altering the trust, Lord Eldon moved methodically ‘up the funnel’, holding that the surplus could be applied (i) to boys from other parishes; if that was not possible, it could be applied (ii) to daughters of the parish, (iii) for the sons of Presbyterians generally; and (iv) for the building of a Presbyterian school. In this manner, the judge progressed more-or-less systematically through variants and levels of utility-increasing abstraction, finishing in a final support for reform to create a local school. He was able to increase the social usefulness of the foundation by incrementally removing the character of the donor. Eason’s analytical method is vulnerable to criticism on the basis that it, in the last resort, provides very little plan-protection for the creators of foundations. It is true that in Wansay, Lord Eldon stopped funnelling upwards at the level of a ‘­Presbyterian school’, but there is nothing inherent in the method to stop courts from abstracting to an extremely general level – ie no particular logical reason why the judge, who was after all confronted with a large and unexpended bounty, should have stopped the process of abstraction at that point. Depending on the size of the funds available, he could have progressed to education in general, or even all of legally valid charity. Once a foundation is understood as a funnel encumbered with egoistic limitations, the logical tendency is to generalisation. At core, the concept of funnelling is directional towards its more abstract end. This generalising tendency can be seen very clearly in the testamentary case, Re  Royce.81 There, a gift was left to the Vicar and Churchwardens of Oakham Church so as to benefit the choir. The donor’s personality was deeply impressed upon the gift, as he had been a member of the choir for over 60 years. In parallel with Wansay, there was too much money, although in this instance, the surplus had never vested. Simonds J reformed the gift so that it could be received by the church alone. In doing so, he stated that a bequest ‘for the purpose of musical services in a church is for the advancement of religion’.82 There were no careful incremental steps taken. The donor’s plans were stretched out so as to encompass abstract religious purposes. Viewed through Eason’s funnel metaphor, it cannot be said that the judge’s approach in Re Royce was conceptually wrong. High abstraction is a natural expression of its logic. Simonds J removed the projected personality of the donor from the bequest almost entirely. Where this happens, ‘the reformed plan’ does not significantly resemble the actual wishes that the donor had in her mind at



80 Attorney

General v Wansay (1808) 15 Ves 231; 33 ER 742. Royce [1940] Ch 514 (Ch). 82 Ibid, 521. 81 Re

Regulating Egoism in Perpetuity  75 the time the foundation was established. It reflects instead an adapted and altered version of it, a formalised and highly legalistic conceptualisation. In consequence of this generalising tendency, the method does not as a matter of fact avoid the dilemma between plan-protection and reform in favour of social utility. There is no g­ uarantee of plan-protection within the approach, and so its incentivising effects on donation are prima facie lost. Despite this conceptual limitation, it might still be countered that even if the process contains a tendency to remove the egoistic self-projection of the donor entirely from the gift, the approach might still be defended as being reasonably effective as a rough-and-ready policy technique. If the point of the funnelling process is understood as maintaining sufficient donor confidence in the planprotection norm as to encourage donation, then the appearance of a donor-centred approach might still be sufficient to achieve that confidence. While this should be acknowledged – ie the funnelling method, although ineffective at the conceptual level, might yet still ensure the confidence of certain donors through a type of legal smoke-screen – such a defence comes at the cost of legal robustness. The rationale behind adopting Eason’s approach shifts from the prospect of an analytically sound compromise between plan-protection and utility-orientated reform, to ­reliance upon a policy-only and technically disingenuous device. The key conceptual weakness with the funnelling approach is that it attempts a single methodological compromise. It aims to reconcile the policy drive to reform foundations alongside plan-protection within the same conceptual device. But it is not necessary to attempt the two things at once. Rather than attempting to devise a single method which simultaneously achieves plan-protection as well as reform at the same time, a balance might be struck by separating out the two conflicting goals in time. The donor’s plans might be given a period of immunity from reform. Her plans might be protected for a period, and then the court might be permitted to reform the foundation according to the priority of social utility. This is the conceptual method suggested by John Stuart Mill in ‘Endowments’.83 There, he proposes that charitable foundations ought to be given immunity before they can be freely reformed, recommending ‘a term at the expiration of which their appropriation should come under the control of the State’.84 In suggesting a protected period prior to permitting state-driven reform of foundations – or nationalisation – Mill did not draw upon any theory of egoism. The key driver behind Mill’s argument is a concern to protect the liberty of innovation. This is in part because he understood foundations as ‘trials’ in which funds might be put to novel social uses, saying: ‘since trial alone can decide whether any particular experiment is successful, liberty should be allowed of carrying on the experiment until the trial is complete’.85 83 J Mill, ‘Endowments’ in J Robson (ed), The Collected Works of John Stuart Mill Volume IV: Essays on Economics and Society Part II (Toronto, Liberty Fund, 1824) 615. 84 Ibid, 619. 85 Ibid, 618.

76  John Picton It is not necessary to accept Mill’s justification located in ‘temporary experimentation’ in order to support a time-limited compromise between perpetuity and court-driven reform. Viewed through the prism of egoistic theory, a defence of time-limited plan-protection based in a belief in donor experimentation is quite hard to mount. It has been seen that the donor’s desire to egoistically self-project is often an encumbrance on the use of capital, and that the drive to egoism causes organisations to tend towards low-utility. To say that experimentation is a key policy priority at law would mean placing a very high faith in the ability of exceptional organisations to act as entrepreneurs, and an equally high tolerance of the mass of lower utility egoistic organisations beneath them. It is a ‘lodestar’ argument, placing trust in the role of unique charitable organisations to act as pioneers. Regardless of the merits or demerits of his rationale, Mill’s proposal can be adapted in the light of insights from egoistic theory. His suggestion of a limited period of plan-protection prior to reform holds out the prospect of a different type of compromise to the funnelling method – one where time-limited plan-protection continues to incentivise egoistic giving, but the foundation is not encumbered with costs of the donor’s egoistic social testimony for all time. The natural objection to a time limit is that it will dampen the spirits of egoistic donors. On the logic of the theory, that must be true to an extent. It has been argued that donors are motivated by the projection of their character and values, so it is also the case that once that projection is limited, then donors will be less legally incentivised. Related to this, it is possible for the hyper-wealthy to ‘forum shop’, and so search for a jurisdiction which allows untrammelled perpetuity. This would come at a clear social policy cost to any time-limiting jurisdiction, as the largest foundations commonly expend disproportionate amounts of capital in the community around them. In precisely the same manner as jurisdictions compete over the loss of business capital from within their borders, it should be accepted that a time limit on the donor’s plans might lead to a loss of philanthropic capital from the given jurisdiction. However, the time limit is a compromise with egoism, rather than a shutting of the door. The proposal still provides a power to lock in egoistic specifications for a period. It has also been seen that donors will normally have mixed motivations. Although it is possible to point to donors who were apparently motivated solely by egoism in connection with perpetuity, such as Thomas Nash’s malevolent bell-ringing foundation, or the remarkable attempt to build ceaseless numbers of statues in the image of the founder in M’Caig, such instances are unusual. It has been seen that even organisations with low social utility will normally reflect competing impulses. For most donors, while a time limit will be disincentivising according to theory, it should not normally be entirely fatal to the complex overarching drive to create a foundation. There is also scope for policy experimentation over time. Just as states vary their business taxes, tentatively feeling their way in a world dominated by mobile capital, the time limit might be treated in the same manner. So, a 50-year limit could, through legislative action, become 100 years were there evidence of n ­ egative

Regulating Egoism in Perpetuity  77 social consequences. In essence, a time-limiting jurisdiction has to assess its policy options within a cost/benefit analysis. On the ‘cost’ side of the ledger, it might weigh the possibility of lost foundations to other jurisdictions and deterred net donations. On the ‘benefit’ side, it should account for its own ability to improve the social utility of organisations as time passes. But there is a further policy problem attached to the compromise. If the period of immunity is treated as sacrosanct, and so completely ring-fenced from any court-led reform, there is a risk of creating a legal space in which donors might try and establish egoistic trusts which are socially harmful. Racist and discriminatory gifts are not unknown to the courts. In such circumstances, past judges have, on occasion, relied upon a process akin to Eason’s funnelling method in order to reform.86 So, it has already been seen in Dominion Student Hall Trust v Attorney General that where a donor attempted to place a race restriction upon the foundation’s beneficial class, the judge moved ‘up the funnel’ and removed the restriction, finding, with some artificiality, that the trust was established primarily to promote community amongst all commonwealth subjects. The formalistic expedient in Dominion Student Hall Trust v Attorney General would not be available in a system where foundations enjoyed a sacrosanct period of immunity. The approach prima facie protects socially harmful trusts alongside those which are merely wasteful. Given that the justification for the policy compromise is to increase the amount of funds allocated to purposes with social utility, an outcome leading to the protection of actively harmful foundations would be selfdefeating. Aware of the risks of social harm connected with a period of immunity, Mill suggested a discretionary power for courts to set aside the donor’s plans where they amount to a ‘clear and positive public mischief ’.87 This power would enable courts to identify harmful trusts and reform them. Such an ability is necessary. Without it, foundations might become vehicles – albeit of a temporary sort – for the worst type of projected character and values. In taking stock of this final policy exigency, it should be clearly and directly recognised that analysis has led only to weak support for plan-protection. The principle, as it is left standing, is a shadow of the common law rules. The end point of the argument is that foundations would be subject to a court-led reform process wherever they are deemed socially harmful, and they would only enjoy plan-protection for a limited period of time, kept under review by the legislature. Ultimately, this is the logical implication of an analysis which has theorised the drive to perpetuity as the egoistic projection of character and values into the future in combination with an argument that such an impulse should only be accommodated by the law if it can be justified.



86 Re

Lysaght [1966] 1 Ch 191 (Ch); Dominion (n 75). ‘Endowments’ (n 83) 620.

87 Mill,

78  John Picton

VII. Conclusion This chapter applies egoistic theory in donative economics to the law of the ­perpetual charitable foundation to make a series of linked critical claims. Through an interpretation of the theory, the drive to create a foundation is linked to an egoistic desire to project character and values into the future. Then, again through that insight, it is seen that the protection of the donor’s plans can be justified at the policy level as a means to encourage donation. Finally, it is argued that because egoistically motivated foundations tend towards low-utility, it is desirable to permit their reform after a period of immunity. The first stage in the chain of argument – that theory can shed light on the drive to establish perpetual organisations – requires the development of a frame to understand the egoistic drive in the context of perpetuity. In the literature, egoistic giving is sometimes understood as analogous to commodity consumption, where the giving is directly connected to pleasure in fundraising inducements. But in the context of donating to create a perpetual foundation, the frame is reductive. It is artificial to say that the donor ‘consumes’ perpetuity. A much fuller view of the egoistic impulse to charity relies on an account of its social aspect. The specific drive to create a perpetual foundation is, at root, a motivation to project the character and values of the donor into the future. Often, the donor is hoping to achieve a legacy after death. The second stage in the chain – justifying plan-protection over time – seeks a rationale for the founder’s significant legal power to impress egoistic plans on property. In the literature, a justification is sometimes found in the concept of obligation – ie the view that the law owes plan-protection to the donor. But that argument tends to artificiality; where there is an egoistic drive to self-projection perpetuity, the law is facilitating the donor’s plans. The law permits the donor a privilege. So, a much better justification is found in policy. Plan-protection incentivises egoistic self-projection, so increasing the number of foundations created. The third stage in the chain – a critical search for methods to reform the plans of donors – flows from the insight that egoistically created foundations will tend to lower social utility and that there is no duty to maintain them. The encouragement of egoistic donation through legal plan-protection carries a cost as well as a benefit. In this regard, theory has further explanatory power. Being a binary theory, it provides a critical mirror, so making it possible to peer across to compare altruistically and egoistically motivated gifts. An altruistic foundation, unencumbered with the donor’s self-projection, has a higher social utility than an organisation formed in a spirit of egoism, and so it can be said that a strong legal norm assuring plan-protection donors can lead to wasteful charity. Ultimately, analysis in egoistic theory leads to a dilemma. Plan-protection both encourages the creation of foundations and also causes their low utility. Rejecting Eason’s funnelling method as unworkable, this chapter argues in favour of limiting the amount of time in which donors might be able to impress personal

Regulating Egoism in Perpetuity  79 plans upon foundations. In recommending such a compromise, it should be accepted that the hyper-wealthy might ‘forum shop’, and so philanthropic capital could be lost to the time-limiting state. However, it also true that a wealthy individual specifically intent on the perpetual projection of their personality and character is unlikely to establish a high-utility foundation in the first place. In line with theory, a period of foundation immunity, subject both to judicial policy control and legislative assessment over time, still provides an egoistic incentive.

80

5 Deploying Communitarianism Bankruptcy Theory to Rescue Insolvent Charities and Maintain Charitable Purposes JOHN TRIBE*

I. Introduction This chapter examines insolvency regulation as it applies to charities1 and applies a rescue culture and communitarianism lens to the law of insolvent charities. The chapter develops the scant literature on the subject.2 This dearth of treatment has arisen as a result of the borderline nature of charity insolvency, sitting as it does between two separate and distinct areas of substantive law, namely, insolvency law and charity law.3 * This chapter was originally delivered as a paper (J Tribe, ‘Charities and Insolvency Law: A creditor biased mishmash or a flexible insolvency framework that benefits general charitable purposes?’ in Society of Legal Scholars 2018 Annual Conference: Law in Troubled Times (Queen Mary, University of London, 2018). I would like to thank the conference attendees for their thoughts on the paper. I would like to thank Prof Debra Morris, Prof Warren Barr, Dr John Picton, Dr John Wood, Prof Pádraig ­McAuliffe, Dr Jennifer Sigafoos and Dr Karen Atkinson for their comments and suggestions on previous drafts of this chapter. This chapter is better for all their efforts. Any errors or omissions are the responsibility of the author alone. 1 For a discussion of the dearth of statistical data on insolvent charities, see J Tribe, ‘Charity I­ nsolvency’ in M Mullen, (ed) Tolley’s Insolvency Law, Vol 125, C35-1-C35-22 (London, LexisNexis, 2019). 2 The most substantial treatment to date has been Yates’s 1999 unpublished PhD thesis and associated articles. See: E Yates, Winding up and Insolvency of Charities, Including Rescue Mechanisms (unpublished PhD thesis, University of Liverpool, 1999). See also: R Pearce and W Barr, Pearce & Stevens’ Trusts and Equitable Obligations, 7th edn (Oxford, OUP, 2018) 430. The Law Commission have also recently touched on some aspects of charity insolvency in their 2017 report Technical Issues in Charity Law (Law Com No 375, 2017); see especially ch 12 ‘Charity and trustee insolvency’. See also the brief: P Framjee, ‘British Charities and Insolvency’ (2009–2010) 12 International Journal of Not-forProfit Law 78. 3 For example, one of the leading texts on charity law, Tudor on Charities (W Henderson, J Fowles and J Smith, Tudor on Charities, 10th edn (London, Sweet & Maxwell Ltd, 2015) para 21–041), notes: ‘A full discussion of those provisions [the Insolvency Act 1986] is beyond the scope of this work, and

82  John Tribe The application of a rescue and communitarian lens to insolvent charities in this chapter contributes a much-needed novel perspective, drawing across corporate rescue culture to the terrain of charities. The social nature of charities makes this a particularly fertile terrain for a communitarianism analysis. When an insolvent charity fails, its remaining asset value is usually made available for the creditors through the liquidation procedure. Using administration as a rescue tool facilitates the survival of those remaining assets for the charitable purposes for which they were given, as opposed to a piecemeal distribution amongst creditors and the breakup of the charitable entity. The rescue and communitarian approach which is advocated in this chapter benefits wider stakeholders and ensures that the general charitable purposes of the charity are continued. Recent high-profile news reports and reported cases4 have brought the issue of insolvent charities to the fore. Kids Company,5 the Wedgwood Museum Trust,6 Age Concern Barking & Dagenham7 and the Work Foundation8 have all recently passed into various insolvency procedures. These high-profile cases highlight how insolvent charities have been regulated over time and how different stakeholder interests are treated in charity insolvencies. The respective rights of debtors and creditors conflict in a unique manner in this area, as the charitable purposes that the charity was created to achieve still potentially exist, despite the insolvency. These charitable purposes can be considered as unique, as no superior moral priority interest equivalent usually exists in an insolvency. This additional and complicating factor is discussed, particularly in the context of keeping this charitable purpose alive, whether that be through the imaginative use of an insolvency procedure such as administration to ‘rescue’9 the charitable purpose for communitarianism objectives, or through the use of an adapted version of the long-held doctrine of cy-près, which may be deployed to help safeguard the charity’s assets for the benefit of the charitable purposes (to the exclusion of other interests such as creditors).10 the reader is referred to standard works on corporate insolvency …’. A perusal of the leading texts on corporate insolvency (cited below) show that there is relatively scant treatment of insolvent charities. 4 See further Tribe, ‘Charity Insolvency’ (2019) (n 1). 5 On the causes of the collapse of Kids Company, see: House of Commons Public Administration and Constitutional Affairs Committee, The Collapse of Kids Company: Lessons for Charity Trustees, Professional Firms, the Charity Commission and Whitehall (HC 2015–2016, 433). See also: C Parsons, ‘Kids Company: risks of insolvency to large charities’ (2016) Corporate Rescue & Insolvency 9(2) 68. See also: K Weakley, ‘When the music stopped’ (2015) (Oct) Charity Finance 12. 6 See: Re Wedgwood Museum Trust Ltd (In Administration) [2012] EWHC 1974 (Ch). 7 F O’Connell, N Patel and A Piper, ‘Restructuring a charity: as easy as ACBD?’ (2010) (Aut) ­Recovery 30. 8 S Whittaker, ‘Making it work: a pre-packaged provisional liquidation’ (2011) Corporate Rescue & Insolvency 4(1) 22 (a provisional liquidation of a Royal Charter entity). 9 On the burgeoning literature on the traditional ‘rescue culture’ in corporate insolvency, see: G  McCormack, ‘Business restructuring law in Europe: making a fresh start’ (2017) 2 Journal of Corporate Law Studies 167; G McCormack, Corporate Rescue Law – An Anglo-American Perspective (Cheltenham, Edward Elgar Publishing, 2008); R Parry, Corporate Rescue (London, Sweet & Maxwell Ltd, 2008); A Belcher, Corporate Rescue (London, Sweet & Maxwell Ltd, 1997). 10 On cy-près generally, see: Pearce and Barr, Trusts and Equitable Obligations (2018) (n 2) 422–436. See also: J Picton, ‘Contradiction in the Law of Charitable Lapse’ (2015) 6 Conveyancer and Property

Deploying Communitarianism Bankruptcy Theory  83 The continued application of the funds for charitable purposes is in line with the idea that English and Welsh law treats any donation to charity as a charitable gift to be applied for charitable purposes generally, not just for the specific purpose that they were given. As Barr and Pearce observe: ‘charitable trusts … have a public character … the law regards property given for any specific charitable purpose as given not merely to that particular purpose, but dedicated to charity in the general sense’.11 This is why the Attorney-General – on behalf of the Crown,12 and latterly the Charity Commission13 – has a general responsibility to ensure that charitable trusts are properly administered and enforced for their charitable purpose. Charity continuation is also in line with recent pronouncements by Lord ­Hodgson when he reviewed the Charities Act 2006 and failed appeal funds. These, he opined, should go to charitable purposes.14 The concept of paramount (or general) charitable intention also shows a pervasive push towards the facilitation of charitable objects.15 Finally, the tax breaks upon which much charitable activity are based are provided by the legislature to encourage charitable giving.16 The central argument of this chapter, that (near) insolvent yet viable charitable companies should be rescued through administration using adapted cy-près like techniques, is geared towards these broad charity facilitation aims. It is no longer satisfactory that an accident of charity form choice at the creation date of the charity can lead to problems on the advent of insolvency, particularly where the vast majority of charities are now incorporated. This problem is especially acute when it is considered that on liquidation the remaining value in the insolvent charity company is distributed to creditors and therefore lost to the charitable purposes for which the charity was created and for which funds were originally donated. It is because of the general charitable purpose that it is imperative that insolvency law provides a mechanism through which the charitable purpose, or at least the asset value, can continue to exist and be applied for charitable purposes. In this sense, technical insolvency can be seen as a ‘supervening impracticality’17 for the affected charity, which insolvency law, and rescue procedures such as the administration procedure in particular, can forestall – particularly if allied with the cy-près doctrine. The rescue culture and cy-près are synonymous in a certain sense in that both exist to facilitate survival of a purpose; a company rescue achieves ongoing Lawyer 480. See also: J Picton, ‘Reforming the Prerogative Cy-Près Doctrine (2014) 6 Conveyancer and Property Lawyer 473. See also: J Garton, ‘Justifying the Cy-près Doctrine’ (2007) 21 Trust Law International 134. 11 See further: Pearce and Barr (n 2) 422, who also refer to ‘the common pot’ of charity (357). 12 See further: Bradshaw v University College of Wales, Aberystwyth [1987] 3 All ER 200, 203, per ­Hoffmann J (as he then was). See also: Attorney-General v Cocke [1988] Ch 414. 13 See, eg, Charities Act 2011, ss 13–20 and s 84. 14 See further: Trusted and Independent: Giving Charity Back to Charities – Review of the Charities Act 2006 (July 2012) app A, para 4. 15 See further: Re Lysaght [1966] Ch 191; JE Martin, Hanbury & Martin Modern Equity, 15th edn (London, Sweet & Maxwell Ltd, 1997) para 15–067. 16 Eg, Income Tax Act 2007, s 527 and Corporation Tax Act 2010, s 481. 17 Per Roxburgh J in Re Lucas [1948] Ch 175, 181 (cited in Pearce and Barr (n 2) 422).

84  John Tribe activity whether that be profit wealth maximisation or the continued existence of a structure that facilitates non-charitable purposes. For a charity, cy-près helps achieve the continuation of charitable purposes18 and, in so doing, ‘increase(s) the resources available to the charity sector’.19 This synergy between rescue and cy-près has not been recognised previously in the leading texts on charity law. Instead, the focus tends to be on liquidation and winding-up procedures that lead to the striking off of the company.20 Language has focused on ‘termination’,21 despite Charity Commission guidance to the contrary and the pressing need to rescue charitable purposes which this chapter advocates. The re-emphasis towards rescue techniques advocated here are important because the social purposes of charities make a rescue approach, based on communitarianism objectives, particularly apposite. Ensuring that the remaining asset value is rescued for charitable purposes is the apotheosis of the insolvency rescue culture approach. The main body of this chapter is divided into three parts. In Part II, it is argued that communitarianism is normatively right for profit-making corporations. Contrary arguments to this proposition are outlined and rebutted. Part III demonstrates that if communitarianism is normatively right for profit-making corporations, then there is no doubt that it is also normatively right for non-profit corporations. Part IV follows through from the first three parts and demonstrates that charitable corporations should have an approach grounded in communitarianism applied to them. This approach is described as ‘adapted cy-près’. The rescue culture as it applies to insolvent companies and cy-près as it applies to charities is also examined. Communitarianism approaches to corporate insolvency law, as a development of pluralism, are unified with general charitable purposes. This unification provides a new approach to the rescue of insolvent charitable companies. A conclusion then follows that argues that insolvency tool rationalisation is needed to: (1) ensure that charitable purposes continue, notwithstanding technical insolvency and claims within that arena; (2) a re-thinking of policy on priority is undertaken that gives precedence to the charitable purposes over other claimants in insolvency. This is a novel contribution that both exerts an influence on the academic field but also more broadly sets the agenda on how insolvent charities should be dealt with by regulators, officeholders and stakeholders going forward. Viable insolvent charities will be rescued, and charitable purposes will be facilitated. Knowledge of how the world of insolvent charities are dealt with has changed.

18 We are generally dealing with subsequent failure in this chapter, although initial failure is also encountered, especially if the company to whom a gift has been made has already been wound up. 19 See JE Martin, Hanbury & Martin Modern Equity (1997) (n 15) para 15–066. 20 Pursuant to Companies Act 2006, s 1012. 21 See, eg, Tudor on Charities, ch 21.

Deploying Communitarianism Bankruptcy Theory  85

II.  Communitarianism and the For-Profit Corporation There should be no doubt that communitarianism is normatively right for profitmaking companies that are insolvent. Some commentators would argue against this proposition, reflecting the fact that bankruptcy theory sits along a spectrum.22 This spectrum commences with law and economics scholars who are focused on creditor-friendly regimes. For them, creditor interests are the sole consideration in the design and implementation of a bankruptcy law.23 Jackson and Baird are the main proponents of this approach. Their centre-right capitalist philosophy24 epitomised in their creditors’ bargain model takes a very narrow view of the way in which a bankruptcy law should operate and be formulated. For Jackson and Baird, only pre-insolvency creditor-based entitlements should be considered. Indeed, for them no other stakeholders have a place within insolvency.25 Hiding behind a Rawlsian veil of ignorance, a hypothetical creditor bargains for an outcome that they would most prefer in any future insolvency, having in mind their ignorant unknowing status of how they may be affected in any subsequent insolvency process. It may involve creditors, with an agreement that they would all receive an equal share in any subsequent liquidation-type process, or it may involve some bargaining which would allow pre-existing proprietary rights to be respected. This bargaining activity establishes creditor interests as being paramount. This is perhaps unsurprising. There is no place for other stakeholders; for the creditors, wider stakeholder interests are simply not what a bankruptcy law is for. For them, the function of bankruptcy law is to operate as a collectivised debt collection device that solely benefits creditors. In taking this view, Jackson and Baird combat two main issues, namely, the race to the bottom and the common pool problem. In the United States, bankruptcy law is federal and collectivised through, for example, the Chapter 11 procedure. At state level there can be a race to the bottom, ie whichever creditor gets to the assets first wins the entirety of the assets.

22 See further: J Tribe, Corporate Insolvency Law: Challenging Orthodoxies in Theory, Design and Use (Cheltenham, Edward Elgar Publishing, forthcoming). See also: V Finch, ‘The Measures of Insolvency Law’ (1997) 17(2) Oxford Journal of Legal Studies 227. 23 See further: TH Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’ Bargain’ (1982) 91(5) The Yale Law Journal 857. See also: DG Baird and TH Jackson, ‘Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy’ (1984) 51(1) The University of Chicago Law Review 97. See also: TH Jackson and RE Scott, ‘On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors’ Bargain’ (1989) 75(2) (Mar 1989) Virginia Law Review Symposium on the Law and Economics of Bargaining 155. 24 See A Flessner, ‘Philosophies of Business Bankruptcy Law: An International Overview’ in JS Ziegel (ed), Current Developments in International and Comparative Corporate Insolvency Law (Oxford, Clarendon Press, 1994) 19. 25 See further: TH Jackson, The Logic and Limits of Bankruptcy Law (Cambridge, Mass., Harvard University Press, 1986). See also: DG Baird, ‘The Uneasy Case for Corporate Re-Organisation’ (1986) 15 Journal of Legal Studies 127; DG Baird, ‘Loss Distribution, Forum Shopping and Bankruptcy: A Reply to Warren’ (1987) 54 University of Chicago Law Review 815.

86  John Tribe ­ ollectivisation removes this competition and in so doing makes bankruptcy law C both fairer and also potentially less costly, at least for those who would receive nothing if last in the race to the assets. The common pool problem is related and highlights the problems that arise when diverse ownership interests compete for a finite pool of resources. This competition can be inefficient and costly. The ­creditors’ bargain model seeks to alleviate these problems by maximising the return to creditors through focusing on pre-insolvency creditor proprietary rights. Jackson and Baird’s view of insolvency law does not therefore take account of a plurality of interests. The rescue culture and potentially interested stakeholders such as employees, directors, family members, the environment, etc, are not within their view of what a bankruptcy law should seek to achieve. Continuing along the theoretical spectrum from Jackson and Baird, we then progress through to scholars26 who espouse a view that broader interests should be taken into account. These interests have very close synergies with Berle and Dodd’s 1930s exchanges on the subject of pluralism when they discussed ‘For whom are corporate managers trustees?’27 These wider stakeholders can include the community, and even charities.28 This broader approach is represented by the theories promulgated by, inter alia, Warren, and Gross,29 who postulate a pluralistic model of bankruptcy law. This ‘centre left’30 view builds on the ideas that were first contained within the American Bankruptcy Act 1938.31 This view of 26 For other contributions to the spectrum, see: DR Korobkin, ‘Rehabilitating Values: A Jurisprudence of Bankruptcy’ (1991) 91(4) Columbia Law Review 717. See also: A Schwartz, ‘A Contract Theory Approach to Business Bankruptcy’ (1998) 107(6) (Apr) The Yale Law Journal 1807. See also: RJ Mokal, Corporate Insolvency Law: Theory and Application (Oxford, Oxford University Press, 2005). 27 ‘Trustee’ is used in the American context in Dodd’s article title and Berle’s response. See: ME Dodd, ‘For Whom Are Corporate Managers Trustees?’ (1932) 45(7) Harvard Law Review 1145. See also: AA Berle, ‘For Whom Corporate Managers Are Trustees: A Note’ (1932) 45(8) Harvard Law Review 1365. See also: WG Katz, ‘Responsibility and the Modern Corporation’ (1960) 3 The Journal of Law & Economics 75; JL Weiner, ‘The Berle-Dodd Dialogue on the Concept of the Corporation’ (1964) 64(8) (Dec 1964) Columbia Law Review 1458. See also: J Hendry, ‘Missing the Target: Normative Stakeholder Theory and the Corporate Governance Debate’ (2001) 11(1) Business Ethics Quarterly 159. See also: B Pettet, ‘The Stirring of Corporate Social Conscience: From ‘Cakes and Ale’ to Community Programmes’ (1997) 50(1) Current Legal Problems 279. 28 See further: BS Prunty, ‘Love and the Business Corporation’ (1960) 46(3) (Law and Philanthropy) Virginia Law Review 467. ‘Corporations. Charities. Statute Making Contributions to Charity by Corporations Intra Vires’ (1939) 52(3) Harvard Law Review 538. See also: JM Werbelow, ‘Corporations: Ultra Vires Acts: Gifts to Educational Institutions’ (1954) 52(5) Michigan Law Review 751. See also: DS Ruder, ‘Public Obligations of Private Corporations’ (1965) 114(2) University of Pennsylvania Law Review 209. 29 See, eg, E Warren, ‘Bankruptcy Policy’ (1987) 54(3) (Summer 1987) The University of Chicago Law Review 775; E Warren and JL Westbrook, ‘Contracting Out of Bankruptcy: An Empirical Intervention’ (2005) 118(4) Harvard Law Review 1197; E Warren, ‘Bankruptcy Policymaking in an Imperfect World’ (1993) 92(2) Michigan Law Review 336. See also: K Gross, ‘Taking Community Interests into Account in Bankruptcy: An Essay’ (1994) 72 Washington University Law Quarterly 1031. Expanded in her later work, see: K Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System (New Haven, Yale University Press, 2009). 30 See Flessner, ‘Philosophies of Business Bankruptcy Law’ (1994) (n24) 24. 31 Interestingly, this places the early development of ‘insolvency pluralism’ outcomes in corporate bankruptcy in America startlingly close to the development of Berle’s pluralism within general

Deploying Communitarianism Bankruptcy Theory  87 insolvency law places the interests of other non-creditor stakeholders who have been impacted by an insolvency as an important factor when designing insolvency systems. Creditors are not the only (and perhaps not even the paramount) parties for the law to consider. Those framing a bankruptcy law, it is argued, should take into account a much broader range of stakeholders who ‘have an interest in a business’s continued existence’,32 for example, ‘older employees, regular c­ustomers, suppliers, the local community, and the public interest’.33 This is the view that Warren proselytises but also that which the United States Congress specifically enunciated in their policy pronouncements.34 In relation to this more expansive view, Warren sees bankruptcy as ‘an attempt to reckon with a debtor’s multiple defaults and to distribute the consequences among a number of different actors’.35 So, in addition to creditors, bankruptcy law should also take into account the interests of, inter alia, and in no specific order: debtors, creditors of all types (eg  tax, tort), employees, the environment, suppliers, and the local community. This is a broad panoply of interests but one which reflects the modern world and the ­business environment within which companies exist, be they profit wealth maximising entities or charitable companies. To focus purely on creditor interests is naïve and panders solely to the banking hegemony. On the bankruptcy theory spectrum, this takes us to the leading exponent of communitarianism approaches to bankruptcy law. In her seminal work on bankruptcy and communitarianism,36 Gross describes a bankruptcy law (to use the American parlance of her work) that takes into account far more interests than creditors. She advocates that ‘community interests must be taken into account in both the corporate and personal bankruptcy systems’. She continues: ‘The application of communitarianism concepts to the world of bankruptcy suggests that the welfare of the community should be very much a part of corporate bankruptcy’.37 In advocating this approach, Gross rejects the argument that bankruptcy is not the instrument to deal with ‘employment in the local area’.38 Simultaneously, Gross also keeps creditor and shareholder interests within her conception of bankruptcy law. Her community interests do not ‘trump other interests’.39 Gross also

company law objectives. On the history of American bankruptcy law policy up until this point, see: PJ Coleman, Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607–1900 (Madison, WI., The State Historical Society of Wisconsin, 1974). See also: F Regis-Noel, A History of the Bankruptcy Law (Washington, DC., Chas, H Potter & Co, 1919). 32 Warren, ‘Bankruptcy Policy’ (1987) (n 29) 783. 33 Ibid. 34 Ibid. 35 Warren, ‘Bankruptcy Policy’ (1987) (n 29) 775. 36 K Gross, ‘Taking Community Interests into Account in Bankruptcy’ (1994) (expanded in her later work, K Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System (2009)) (n29). 37 Gross, ‘Taking Community Interests into Account in Bankruptcy’ (n 29) 1042. 38 P Aghion, O Hart and J Moore, ‘Improving Bankruptcy Procedure’ (1994) 72 Washington ­University Law Quarterly 849. 39 Gross, ‘Taking Community Interests into Account in Bankruptcy’ (n 29) 1033.

88  John Tribe does not reject economic approaches. Instead she advocates for a ‘more expansive economic model’.40 The Gross view is all-inclusive. Multiple stakeholders must be considered when framing a bankruptcy law. This approach is to be commended, as it respects and reflects the innate human interests that are prevalent in bankruptcy.

III.  Communitarianism and Non-Profit Corporations The previous section has demonstrated that communitarianism is normatively right for profit-making corporations. There is no doubt that it is also normatively right for non-profit corporations. This is because charities have social purposes which have broad support. This makes creditor interests less salient in policy terms. Some might argue to the contrary. They might suggest that charities are less significant than for-profits and so they do not need a communitarian regime. Or they might argue that charity insolvency, and the subsequent use of liquidation, is rare. In consequence, there is no need for a communitarian regime. Both insights are wrong, as the following section demonstrates. Before rebutting these points, we must demonstrate why a communitarianism approach is right for nonprofit corporations. When citing a 1940s farming study, Gross concentrates on ‘quality of community life’ in an owner-managed farming community, noting that ‘Streets, sidewalks, parks, schools, and religious and political involvement were all better in the community’.41 These public concerns are familiar to charity lawyers, although of course if something is public, it is not necessarily charitable.42 Charity case law abounds on parks,43 schools,44 religious activity45 and political activity.46 Indeed, the charitable head of community benefit47 is quite close to bankruptcy communitarianism in the sense of objectives. Both approaches are grounded in altruistic behaviour. Both demonstrate that human nature is not inherently self-interested. Both engender belief in ‘the goodness of human nature’.48 Etzioni suggests that 40 Ibid. 41 Ibid. 42 See Blair v Duncan [1902] AC 37. See also Re Diplock [1941] Ch 253, which discussed whether benevolence might not be charitable. 43 Guild v IRC [1992] 2 AC 310. 44 On education, see: Re Mellody [1918] 1 Ch 228; Re Shaw [1958] 1 All ER 245; Re Hopkins [1965] Ch 669; Re Pinion [1965] Ch 85; Independent Schools Council v Charity Commission for England and Wales [2011] 12 WLUK 67; Abbey, Malvern Wells Ltd v Minister of Local Government [1951] Ch 728. 45 See further: Neville Estates v Madden [1962] Ch 832; Re South Place Ethical Society [1980] 1 WLR 1565; Varsani v Jesani [2002] 1 P & CR DG11; IRC v Baddeley [1955] AC 572; Thornton v Howe 54 ER 1042; (1862) 31 Beav 14; United Grand Lodge v Holborn [1957] 1 WLR 1080. 46 McGovern v AG [1982] Ch 321; R v Radio Authority, ex parte Bull [1998] QB 294; IRC v Yorkshire Agricultural Society [1928] 1 KB 611. 47 On which, see further: Re Robinson [1951] Ch 198; Re Wedgwood [1915] 1 Ch 113. 48 Gross, ‘Taking Community Interests into Account in Bankruptcy’ (n 29) 1040.

Deploying Communitarianism Bankruptcy Theory  89 communitarianism seeks to safeguard and enhance society’s well-being.49 This is exactly what charity also seeks to achieve and it is why insolvency laws should be refined to help facilitate the general charitable objective. The parallel between this communitarianism reasoning and the social function of charities is striking. All that is missing from Gross’s depiction of community are approaches that ameliorate the plight of the poor50 and that are for the encouragement of sport.51 But both are of interest to a community, or at least a community that ‘seeks to make individuals responsible for their community’s well-being’,52 ie act within a communitarianism framework. Furthermore, even employees have fallen within the purview of charity law, something that oftentimes struggles to come within some scholars’ perception of bankruptcy law, as we have seen.53 Is it tenable that bankruptcy law eschews the interests of employees whilst the law of charity embraces them? A broadly conceived bankruptcy law grounded in the communitarianism philosophy works towards the same publicly beneficial objectives as charity law. It would be indefensible to silo academic progress in the field of corporate communitarianism and treat that learning as if it were separate from the charitable sector. We are focused on a multiplicity of interests that recognise, as does the law of ­charity, that bankruptcy ‘is immensely more complex than simply determining which approach would yield the greatest recovery to one segment of society’.54 Charity law and a communitarian bankruptcy law are facilitating very similar objectives. Drawing them ever closer through adapted cy-près deployment demonstrates how the two approaches are natural bedfellows. Schermer objects to a communitarian view of bankruptcy for definitional and application reasons.55 He notes: ‘The problem is not that community interests cannot be identified, but that there are so many potential interests in every bankruptcy’.56 Having a plethora of interests or broad term of art, ie community, does not make something impossible. Indeed, public benefit with charity law is routinely adjudicated on by the English and Welsh judiciary. Community interests are difficult to quantify and are therefore excluded from the economic approach to bankruptcy. Public benefit within charity law has also

49 See further: A Etzioni, The Spirit of Community: Rights, Responsibilities, and the ­Communitarian Agenda (The Crown Publishing Group, 1993). See also: E Frazer, The Problems of Communitarian ­Politics: Unity and Conflict (Oxford, Oxford University Press, 1999). 50 See further: Re Coulthurst [1951] Ch 661; Re Sanders [1954] Ch 265; Re Resch [1969] 1 AC 514; Re Faraker [1912] 2 Ch 488. 51 Re Dupree [1945] Ch 16. 52 Gross, ‘Taking Community Interests into Account in Bankruptcy’ (n 29) 1036. 53 On employees as recipients of charity, see: Re Oppenheim [1951] AC 297; Dingle v Turner [1972] AC 601. 54 Gross, ‘Taking Community Interests into Account in Bankruptcy’ (n 29) 1034. 55 BS Schermer, ‘Response to Professor Gross: Taking Community Interests into Account in ­Bankruptcy – a Modern Day Tale of Belling the Cat’ (1994) 72 Washington University Law Quarterly 1031. 56 Ibid, 1051.

90  John Tribe been notoriously difficult to define, but this has not stopped the courts enforcing charitable instruments. Narrowly focused law and economics exponents simply argue that bankruptcy law is about creditors’ interests and increasing returns to creditors in the most efficient manner possible, meaning that ‘community welfare and well-being are not appropriate concerns for bankruptcy’.57 Gross’s broad approach is the closest we have to the suggestion of machinery which expedites a function or purpose of the juristic person that acknowledges the wider society in which that company sits and how that society is impacted by that company, be it charitable or profit wealth maximising. This part of the chapter opened by noting the existence of a possible academic position which holds that charities are less significant than for-profits and so do not need a communitarian regime. A possible position was also noted that charity insolvency, and the subsequent use of liquidation, is rare and there is no need for a communitarian regime. Both points are incorrect. There are numerous charities that have many millions of pounds’ worth of capitalisation, eg Oxfam, Save the Children International, Cancer Research UK and the National Trust.58 If they run into financial difficulties and edge towards failure, it is not appropriate to force them to use outmoded insolvency approaches such as liquidation. Where possible, the public benefit elements of their work must be permitted to survive. As with for-profit companies, non-profit charities should be using the latest techniques in restructuring and insolvency. The rescue agenda should be as alive and buoyant in the charity sector as it is in the private for-profit sector. Indeed, rescue should be more prevalent in charity insolvency because of the social and community interests that charities strive to achieve. This includes a communitarianism approach through the administration procedure. The next part of the chapter demonstrates why charity insolvency is, unfortunately, far from rare and why new approaches to charity insolvency are needed. To ignore the incidence of charity insolvency neglects the important activity of this engine of social good. But to compound the neglect through engaging in charity insolvency by adhering to narrow liquidation outcomes or a focus on creditor interests, as opposed to broader interests, neglects the unique nature of ­charities and their charitable purposes. This chapter does not go so far as to advocate the introduction of a special administration regime, which exists for colleges59 and railways,60 but it does call for a sea-change in approach, as the next section demonstrates.

57 Gross, ‘Taking Community Interests into Account in Bankruptcy’ (n 29) 1035. 58 See further: www.ncvo.org.uk/images/documents/policy_and_research/Britains-biggest-charitieskey-features_final.pdf. 59 The first education administration order has been made under the Technical and Further Education Act 2017 (TAFEA 2017). The Corporation of Hadlow College went into administration in June 2019. The TAFEA 2017 special administration regime protects the interests of college students. 60 See: Railways Act 1993, s 59(1). See also: The Railway Administration Order Rules 2001, 2001 No 3352. Railtrack PLC, for example, went into railway administration on 7 October 2001.

Deploying Communitarianism Bankruptcy Theory  91

IV.  Insolvent Charitable Corporations, Rescue and ‘Adapted Cy-près’ Charity law already contains a mechanism that can meet the demand raised in this chapter for a communitarian-based rescue culture approach to insolvent charities, namely, cy-près. An adapted version of cy-près would help facilitate the administration of an insolvent charity with rescue aims – most importantly, the survival of the charitable purpose of the insolvent charity. This novel idea of adapted cy-près is the main contribution of this chapter to the current unsatisfactory position of insolvent charities. To facilitate the rescue of insolvent charitable corporations, they should have available ‘adapted cy-près’ through the administration process. This is a perfection and adaptation of an existing charity device. This proposal advocates a change in approach to the historic position of cy-près, ie a device that seeks to serve the interests of a single donor. Adapted cy-près seeks to serve the interests of the wider community by helping to facilitate the rescue of an insolvent charity. Adapted cy-près could be used as part of an insolvency process to ensure that an insolvent charity, which is fundamentally viable, is restructured so that the charity is still able to carry out its charitable purposes. For example, a charitable company that is used to administer a museum, but which is part of a wider group of insolvent companies, need not fail with the rest of the group of companies if adapted cy-près administration was available. The procedure would be used to ensure that the charitable entity was rescued and could continue to fulfil the charitable purposes for which it was formed. Before developing this point, we will examine some foundational points on charity insolvency. These demonstrate why adapted cy-près administration is required. As part of charity trustees’ continuing fiduciary obligations, they are required to monitor the financial health of the charity,61 including making decisions on whether or not to borrow,62 or on general issues of financial stability. If insolvency becomes an issue,63 trustees have a number of tools to use depending on which legal device has been adopted, eg liquidation, administration, receivership, company voluntary arrangements (CVAs), etc.64 These continuing obligations 61 For a general overview, see the Charity Commission’s guidance document: ‘Managing a charity’s finances: planning, managing difficulties and insolvency’ (CC12) (Charity Commission, June 2010) (updated January 2016; new format January 2017). See further: E Yates, Winding Up and Insolvency of Charities (1999) (n 2), summarised in: E Yates, ‘Winding Up Charitable Companies – Special Cases?’ (2000) 3 (May) Insolvency Law 120. See also: E Yates, ‘Problems of Winding Up Charities’ (2002) 8(1) Charity Law & Practice Review 53. For a brief overview of insolvency rules and charities, see: M Arnott and L Ransley, ‘When charities come to grief ’ (2014) (Sum) Recovery 18. See also: A Pepper and J Rumley, ‘Restructuring and insolvency of charities’ (2006) (Win) Recovery 30. 62 See further: C Sims, ‘When and how should charities borrow?’ (2014) 25(4) Tolley’s Practical Audit & Accounting 46. 63 Pursuant to the tests contained in Insolvency Act 1986, s 123, on which see: BNY Corporate Trustee Services Limited and others (Respondents) v Eurosail-UK 2007-3BL PLC (Appellant) [2013] UKSC 28. 64 See further Tribe, ‘Charity Insolvency’ (2019) (n 1).

92  John Tribe make the need for adapted cy-près to facilitate a rescue administration all the more obvious. These positive obligations for trustees to monitor and maintain the ­financial health of the charity help to ensure that the charitable purposes are achieved. Adapted cy-près extends this continuation of charitable purposes, as well as attendant financial responsibility, through illiquid periods. In addition to the insolvency tools that are used in the context of an insolvent charity, it is important to remind ourselves of the underlying tensions that exist behind the use of these tools. In the context of insolvent charities, we are dealing with debtors and creditors but also with the additional tension of a charitable purpose and money being gifted towards facilitating that purpose by donors, not placating creditor interests in any subsequent insolvency procedure. This balancing of interests around a finite sum is not a new phenomenon generally or within the context of charity insolvency. As Jones has noted, in the early modern period stage of charity law development, the charitable use trumped bankruptcy law’s distributional purposes. He observed: ‘Identifiable property (land or chattels) held to charitable uses by the bankrupt as feoffe was not an asset available for distribution amongst his creditors “quia nest part de lour estate”’ (underlined emphasis added).65 Whether or not the interests of charity and charitable purposes in particular can now usurp the interests of creditors (and other stakeholders) in the battle for value will now be considered.66

A.  Why the Cases are Anti-Communitarian There are a number of conceptually refined cases exploring the position of charitable companies that are going through an insolvency procedure and that have asset value that could be used in the liquidation to satisfy creditors, or in the alternative, to undertake the charitable purposes for which the original gifts were given. This question becomes particularly important where the gifts are given for a charitable purpose before the company to which they are given goes into an insolvency procedure and where the testators die before that insolvency procedure is instigated. If that company then goes into administration or liquidation, the insolvency practitioner will have to determine whether or not the money should be used for: (1) the charitable purposes for which the donors gave the money, or (2) be distributed through a liquidation to the company’s creditors as part of the general 65 G Jones, History of the Law of Charity 1532–1827 (Cambridge, Cambridge University Press, 1969) 95. Jones continues: ‘But if money given to a charitable use were lent to one who became bankrupt, the charitable use would rank with other creditors …’. This grouping together of the charitable use with the general body of creditors seems to indicate that in this instance charity law did not trump insolvency law as seems to be the case with the quote cited in the body text. 66 On charities and how they own assets, see further: I Dawson and J Alder, ‘The nature of the proprietary interest of a charitable company or a community interest company in its property’ (2007) 21(1) Trust Law International 3.

Deploying Communitarianism Bankruptcy Theory  93 assets of the company. Simply put, should an insolvency procedure render gifts to a charitable company ineffective? From a communitarian perspective, we might expect that the money would still be used for the charitable purposes for which it was given, as opposed to the position at law which is that the money is available to placate the general body of creditors (some of whom may of course be charities themselves). We cannot commune with the dead donors to divine their intentions when an insolvency event has intervened after their own death and once the company has passed into an insolvency procedure.67 At least one judge has noted that it is unlikely that the testator would have wanted their donation to be given to the company if they had known of the liquidation68 and another has apparently suggested that the donor would certainly not have intended that their gift was to be made generally available to creditors.69 However, the plain words of the will override these considerations and the court will not speculate about a given testator’s intentions. They will ­interpret and apply the plain words of the testamentary document in relation to the gift. Judges have taken the view that cy-près is just about doing whatever the donor wants.70 Invariably this intention is to help further charitable purposes of a specific charity. So, all that adapted cy-près would be doing when deployed in an insolvent environment, as defined and argued in this chapter, is to also further donor intention and charitable purposes. Here, two leading cases are used to bring out the conceptual complexity; ­Liverpool and District Hospital for Diseases of the Heart v Attorney-General71 (‘Liverpool and District Hospital’) and Re Wedgwood Museum Trust Ltd (in  ­administration)72 (‘Re Wedgwood’) highlight the tensions at play between creditors and charitable purposes.73 The cases –particularly Re Wedgwood – also demonstrate why it is important to rescue a charity for communitarian objectives. As we will see, creditors were actually the main beneficiaries in the case, but the

67 This supernatural contact has been tried in the context of private purposes trusts, albeit in an entirely fictional, yet enlightening, conversation. See: LA Sheridan, ‘Power to Appoint for a NonCharitable Purpose: A Duologue or Endacott’s Ghost’ [1963–64] 13 DePaul Law Review 210. 68 Neuberger J in Re ARMS (Multiple Sclerosis Research) Ltd [1997] 1 WLR 877 (see below). Neuberger J noted that he had: ‘sympathy for the proposition that the testator would not have intended the gift to the company to take effect had he known that the company was in insolvent liquidation at the date of his death.’ (p 883(C)). 69 Millett J (as he then was) was quoted in the liquidator’s affidavit in Re ARMS (Multiple Sclerosis Research) Ltd [1997] 1 WLR 877 (at 870(B)) as indicating, ‘that he was not happy with the possibility that future funds given with the intention of being used for charitable purposes might not be so used but might be used to pay creditors’. 70 See, eg, Philpott v Saint George’s Hospital (1859) 27 Beav 107; Re Weir Hospital [1910] 2 Ch 124; Attorney General v Sherbourne Grammar School (1854) 18 Beav 256; Re Wilson [1913] 1 Ch 314. On cy-près and these authorities, see further: J Picton, Charitable Intention in the Cy-Pres Doctrine and Related Trust Principles (unpublished PhD thesis, University of Liverpool, 2013). 71 Liverpool and District Hospital for Diseases of the Heart v Attorney-General [1981] Ch 193. 72 Re Wedgwood Museum Trust Ltd (in administration) [2011] EWHC 3782 (Ch); [2013] BCC 281 (Ch D (Birmingham)). 73 For further cases see Tribe, ‘Charity Insolvency’ (2019) (n 1).

94  John Tribe charity was able to continue due to government intervention. If charity insolvency law is used to permit adapted cy-près and a rescue through administration, then insolvency law itself will achieve this positive and beneficial outcome, namely, the survival of an internationally important porcelain collection and pottery museum. Cy-près is the tool that can be used to ensure that charity is still facilitated despite some interruption to the legal form that is administering that charity. Cy-près is an incredibly powerful equitable doctrine that allows the court to alter the objects of a charity.74 Traditionally, cy-près has only applied to charitable trusts. More recently the doctrine has been extended to companies,75 perhaps as part of a general move away from confines such as impossibility and impracticality.76 Furthermore, in this chapter we are discussing the spirit of the cy-près doctrine as well as its minutiae. Administrative schemes are also of note,77 but we are dealing with entities that have gone into an insolvency procedure and which may not survive, particularly if there is no viability. This makes the application of an administrative scheme difficult, whereas cy-près can look to new entities as part of any rescue attempt. The concept of failure is also important to cy-près, as without it the doctrine cannot be applied. If the charity is able to continue in some way, there is no failure, and cy-près cannot be applied. Technical insolvency and subsequent passage into an insolvency procedure is being taken as evidence of failure in this chapter.

i.  Liverpool and District Hospital for Diseases of the Heart Liverpool and District Hospital78 concerned a heart disease research and treatment charity that was run through a company limited by guarantee, the Liverpool and District Hospital for Diseases of the Heart (LDHDH), which was in liquidation. LDHDH’s main activity had been transferred to a local National Health Service hospital in 1948 as a result of the National Health Service Act 1946. The architect of these reforms, Nye Bevan, echoed the nineteenth century dissatisfaction with charity and philanthropy,79 as opposed to state provision, when in 1946 he claimed that it was ‘repugnant in a civilized community for hospitals to have to rely upon private charity’.80 He continued: ‘I have always felt a shudder of repulsion when

74 See: J Garton, ‘Justifying the Cy-Près Doctrine’ (2007) 21(3) Trust Law International 134. 75 For a recent example, see: Phillips v The Royal Society for the Protection of Birds [2012] EWHC 618 (Ch). 76 See: Pearce and Barr (n 2) 424, citing Re Weir Hospital [1910] 2 Ch 124, and Report of the C ­ ommittee on the Law and Practice relating to Charitable Trusts (Cmd 8710, 1952) para 365. (The  Nathan Committee). 77 Ibid, 426. 78 [1981] Ch 193. See: I Dawson and J Alder, ‘The Nature of the Proprietary Interest of a Charitable Company or a Community Interest Company in its Property’ (2007) 21(1) Trust Law International 3. 79 On which, see further Tribe, ‘Charity Insolvency’ (2019) (n 1). 80 G Finlayson, Citizen, State and Social Welfare in Britain 1830–1990 (Oxford, Clarendon Press, 1994) 272.

Deploying Communitarianism Bankruptcy Theory  95 I see nurses and sisters who ought to be at their work … going about the streets collecting money for the hospitals’.81 The hospital became vested in the Minister of Health in July 1948. The charity’s research into causes and cure of heart disease and other ailments continued for a short time under the auspices of the Institute of Research for the Prevention of Disease. This ceased in or around December 1968. These ‘research assets’ did not vest in the Minister. In 1978, the Attorney-General brought a successful winding-up petition to wind the company up.82 There was a surplus of £14,727 in 1979, approximately £70,820 in 2019 prices. Slade J had to consider whether (1) the assets of the company should be used in satisfaction of the company’s members, or (2) any surplus should be distributed to an institution or institutions having similar objects to those of the charity – ie the value should be distributed cy-près. This second destination for the funds adhered to a clause in the company’s memorandum of association. Slade J held that the company was both the legal and beneficial owner of the assets.83 Whilst operating as a charity, the company was nevertheless not a ­trustee over the fund. Therefore, on winding up, the assets were to be distributed to the company’s members pursuant to the relevant statutory provisions.84 Clause 9 of the company’s constitution became operative. As the company held the assets for strictly charitable purposes pursuant to its constitution, a scheme would be directed on the premise that the property and funds of the company were applied cy-près. The judge observed: ‘In my judgment, the court, in exercise of its ­jurisdiction over charities, can and should give effect to this provision [clause 9] by directing a cy-près scheme’.85 The case has been cited as authority for the proposition that the ‘court has cy-près jurisdiction on winding up’.86 Counsel for the Attorney-General acting on behalf of charity and charitable purpose facilitation argued for Clause 9 of the company’s constitution to be operative and for the money to be applied cy-près on the winding up of the company. This was because the members of the charity had no interest in its assets. He was successful in part but not on the company occupying the position of trustee argument. As part of his argument he noted that: The Companies Act 1948 does not provide a complete code regulating the affairs and assets of a charitable company on its liquidation. It is necessary to examine the provisions in the memorandum and the chapters and to the general principles of law concerning charitable trusts and their administration by the court.87

81 Ibid. 82 Pursuant to Charities Act 1960, s 30(1) (as it then was). 83 Following: Bowman v Secular Society Ltd [1917] AC 406. 84 In this instance, Companies Act 1948, s 265. 85 [1981] Ch 193, per Slade J at 215(F). 86 See: Martin, Hanbury & Martin Modern Equity (1997) (n 15) 433, citing Companies Act 1985, s 558 (a provision which has now been superseded). 87 [1981] Ch 193, 196(H).

96  John Tribe Slade J’s judgment is a progressive move forward towards communitarian approaches to charity insolvency. In permitting the use of cy-près in an insolvent environment, albeit in a liquidation, Slade J facilitated the continued use of the remaining asset value in the company for charitable purposes. Indeed, the drafters of Clause 9 brought this about through their design of the clause. Slade J then enabled their intentions to be realised. If this approach is scaled up and refined for use in the context of a rescue culture led by administration, then communitarian objectives can be achieved and charitable purposes satisfied despite insolvency. This approach is desirable as it ensures the widest number of stakeholders benefit following a charity insolvency. Here we are eschewing the narrow law and ­economics approach to bankruptcy law of Jackson and Baird as discussed above. Instead we are adhering to Gross’s communitarianism in bankruptcy law with its wider stakeholder benefiting attributes. In the context of insolvent charities, the charitable purposes are the principal beneficiaries of this approach. We have come a long way since 1980 and not necessarily for the better. It could be argued that the scales of insolvent charity regulation have rebalanced in another direction to such an extent that there is now a confusing morass of provisions that apply to an ever-increasing array of legal forms. This makes the job of the trustee much more complicated than it need be. The multiplicity of insolvency provisions that relate to insolvent charities depending on the legal form that has been used to transact the charitable activity adds to the burden. It is especially intolerable, considering the overarching point of charities and why the State treats them so specially in all these other regards, that the form that is chosen at the moment of creation (possibly with little thought or knowledge of the complexities) leads to such different insolvency outcomes. Some streamlining is in order. One reform suggestion is that one specific procedure be applied to all insolvent charities, irrespective of legal form. In this sense, we would ape the generally applicability of American bankruptcy procedures, such as Chapter 11, greatly simplifying the insolvent charity landscape. The superior moral priority of the charitable purpose makes for a strong moral argument that there should be one approach for all insolvent charities, and it should be adapted cy-près.

ii.  Re Wedgwood Museum Trust Ltd Re Wedgwood88 concerned the 2009 insolvency of the Wedgwood Group of companies. The group included a trading company (Josiah Wedgwood and Sons Ltd) and a museum company (the Wedgewood Museum Trust Ltd).89 His Honour

88 Re Wedgwood Museum Trust Ltd (In Administration) [2011] EWHC 3782 (Ch); [2013] BCC 281 (Ch D (Birmingham)). See: C Farlow-King, ‘Going to pot?’ (2015) 172 (Dec) Trusts and Estates Law & Tax Journal 12. 89 The Wedgwood family were not strangers to insolvency. See: J Tribe and D Graham, Bankruptcy in Crisis – A Regency Saga: Part 4 – Basil Montagu (1770–1851) (2009) 22(9) Insolvency Intelligence 132.

Deploying Communitarianism Bankruptcy Theory  97 Judge Purle QC had to consider whether the museum company held property on charitable trust, or whether, in the alternative, the company held the gifted property for the benefit of the costs, charges and expenses of the administration and the liabilities of the museum company to its creditors. £134.7 million pension deficit liabilities rested on this question because of section 75 of the Pension Act 1995, which makes the surviving group company liable. The museum company was incorporated in 1962. The collection was gifted to the museum company in 1964. The motivation for this transfer from a trading company within the Wedgwood group was to protect the collection from adverse trading activities. Presumably this would include ultimately exposure to creditors, particularly those of the trading company, but also creditors more generally, including those of the museum company. In devising this corporate structure there would be a permanent inalienable collection. As HHJ Purle QC noted, the collection, valued between £11.5 and £18 million, ‘is a unique collection of pottery and other artefacts and items of historical importance built up over many decades’.90 The 1964 deed poll activating the gift did not mention a charitable trust. The museum company was identified as the beneficiary. As noted above, insolvency occurred in 2009 and the museum company was placed into administration. The Attorney-General argued that the museum company held the 1964 gift on charitable trust for charitable purposes. The pension fund trustee argued that the company owned the collection in law and had done since the 1964 transfer. Accordingly, the collection was available for the company’s creditors pursuant to the insolvency legislation. HHJ Purle QC held that the assets were those of the museum company and that they were not held on charitable trust. The assets were therefore available for the company’s creditors, including the pension fund, across the whole of the Wedgwood group of companies. This meant that the museum collection could potentially be broken up and sold in order to satisfy the pension deficit. HHJ Purle QC reflected on this when he observed: ‘This is a sad conclusion for those who are concerned to preserve a collection which is … part of our cultural heritage and of immense importance, but it is the combined result of the pension protection and insolvency legislation’.91 However, there is a counter-balancing argument; one to which HHJ Purle QC paid heed. He observed: It is at least a legitimate view that the tragedy that befalls working people when their pensions are affected by insolvency is at least as great as the tragedy that has befallen, or may now befall, the collection in this case.92

90 [2011] EWHC 3782 (Ch); [2013] BCC 281 (Ch D (Birmingham)) per HHJ Purle QC, paras 2, 7. 91 See: Re Wedgwood Museum Trust Ltd (In Administration) [2011] EWHC 3782 (Ch); [2013] BCC 281 (Ch D (Birmingham)), per HHJ Purle QC, para 56. 92 Ibid.

98  John Tribe It is the Wedgwood collection, and the benefits it brings for arts, scholarship and wider stakeholders, that is the loser. In communitarianism terms, the outcome of the decision of HHJ Purle QC is problematic, given its strict adherence to insolvency distribution techniques. Creditors benefit, including pension fund employees, but wider stakeholders and indeed the continued existence of the museum as a centre of international importance for Wedgwood pottery suffers dramatically. A communitarian insolvency law seeking to rescue the charitable entity through administration would have engaged prior to the pension deficit issues and would have sought to restructure the group of companies so that the Wedgwood collection was not placed in danger.

B.  Adapted Cy-Près Specific insolvency procedures have qualities that lend themselves to different outcomes. As noted above, it is a communitarian axiom in English and Welsh corporate insolvency law that rescue is the mantra that should be applied to troubled companies. As the above treatment has highlighted, there is no reason why this should not be equally true of charitable companies where administration is a relevant procedure, ie there is viability. Within the context of insolvent charities, there are two major ways forward in terms of reform that will potentially benefit the overall coherence of insolvency law policy delivery. First, we could maintain the status quo and trust the professionalism of insolvency practitioners and their professional advisors to handle insolvent charities with the appropriate devices. This is the least-favoured option. This approach has not worked well to date in the context of insolvent charities. Few have been rescued. If we do have to focus on the substance of current tools and techniques, we may learn from Martin’s expansive view of cy-près, where she noted: ‘A testator should always be careful to identify his beneficiary correctly. It is difficult to see why this should automatically negative a general charitable intention’.93 It is this facilitative view which could enable the funds of an insolvent charity to be applied to general charitable purposes instead of creditor claims. This approach is exemplified by Re Finger’s Will Trusts, where a gift failed, ‘but was saved from lapse by the finding of a general charitable intention, and was accordingly applied cy-près’.94 Alternatively, and as a second and preferred approach, we should instead undertake a root and branch reform at the same time as much wider policy reform is undertaken. It is this second route that is being advocated in this chapter. Adapted cy-près within the context of a rescue culture based on the administration procedure is the vehicle to achieve communitarianism objectives.



93 Martin, 94 Ibid,

Hanbury & Martin Modern Equity (1997) (n 15) 435. 434.

Deploying Communitarianism Bankruptcy Theory  99 It is well known that corporate insolvency law treats a trust as separate and distinct from the general body of assets,95 whether it is, for example, a purpose trust96 or a resulting trust.97 Why, then, are charitable trusts treated differently and subsumed into the assets of the company? The short answer is that the assets are not held on trust per se by the company, even though they are held for a charitable purpose. The assets form part of the company’s estate pursuant to section 436 Insolvency Act 1986.98 However, it is submitted that charitable asset value, whether held on trust by the company or not, should be treated as if it were held on trust, thus helping the general push towards continued charitable activity advocated in this chapter. If the property is held in this way, then it is available for charitable use. If adapted cy-près is used to facilitate the continued existence of the charitable purposes through administration, as opposed to asset value distribution to creditors via liquidation, then the cy-près criteria contained in section 67 of the Charities Act 2011 may in themselves come to be viewed as communitarian in nature, or at least facilitative of communitarianism objectives. The ‘matters’ which the court or Charity Commission are to consider when formulating a cy-près scheme are: (a) the spirit of the original gift, (b) the desirability of securing that the property is applied for charitable purposes which are close to the original purposes, and, (c) the need for the relevant charity to have purposes which are suitable and effective in the light of current social and economic circumstances.99

It is the last of these ‘matters’ that is closest to communitarian objectives, particularly ‘current social … circumstances’.100 These could include benefiting the multiplicity of stakeholders that have been identified in this chapter. In any future reform, these social circumstances could be clearly enunciated and include the continued existence of charitable purposes through an insolvency and administration to benefit wider stakeholders. The second section 67(3) Charities Act 2011 ‘matter’ contained in subsection (b) and in particular the section of the clause that reads ‘securing that the property is applied for charitable purposes’101 is the essence of what adapted cy-près is attempting to achieve in an insolvent environment. Using adapted cy-près in an insolvent environment would ensure that the

95 See further: K Van-Zwieten, Goode’s Principles of Corporate Insolvency Law, 5th edn (London, Sweet & Maxwell Ltd, 2018) paras 6–41. 96 Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4, [1970] AC 567. See further, W Swadling (ed), The Quistclose Trust: Critical Essays (Oxford, Hart, 2004). See also: W Goodhart and G Jones, ‘The Infiltration of Equitable Doctrine into English Commercial Law’ (1980) 43(5) MLR 489. 97 See: Prest v Petrodel Resources Ltd [2013] 2 AC 415. See further: J Tribe, ‘Who Would Be a ­Creditor? Prest in the UK Supreme Court and the Effect of Trusts on Insolvency’ (2013) 6(4) Corporate Rescue and Insolvency 91. 98 Which states: ‘‘property’ includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property’. 99 Charities Act 2011, s 67(3). 100 Charities Act 2011, s 67(3)(c). 101 Charities Act 2011, s 67(3)(b).

100  John Tribe donors’ intentions are carried out and that charitable activity is not hampered by the insolvency of the corporate form that is being used to administer the charitable purposes. This charitable purpose rescue can obviously only occur when there is substantial asset value remaining pursuant to the statutory insolvency tests.102

V. Conclusion The philanthropists of the nineteenth century recognised a pressing human need that required sating. By facilitating the continued activity of charitable companies, we will continue with the long philanthropic and charitable tradition of ‘improving society and the quality of life for all’.103 In setting out the framework for insolvent charities, this chapter has shown that nearly the entire corpus of insolvency mechanisms is available to deal with insolvent charities. In part, this is good, as it allows the deployment of rescue mechanisms and clearly structured liquidation provisions. But this choice perhaps says more about the current state of English and Welsh insolvency law. If the now-insolvent charity had been formed as a trust, as opposed to a company, the general charitable purpose would continue, as the money would not be available for the general body of creditors. From the communitarian perspective advanced in this chapter, the anomalous position between a not-for-profit entity and a for-profit entity should no longer be countenanced. The corporate form should either be withdrawn from use for charities or there should be a specific condition within the memorandum of association which stipulates that on the advent of insolvency the money will be held for the benefit of the general charitable purpose. Creditors have constructive notice of this document, and as with objects clauses, creditors can take measures to protect themselves when dealing with this species of company. The quid pro quo could be an elevation of the standard expected of directors in a charitable company to reflect the large amount of asset value that will never be available for creditors. It is irretrievably bound to the general charitable purpose. Failure to adhere to higher duties could result in greater contributions from unfit charitable company directors. In the light of the communitarian approach and rescue culture lens applied in this chapter, it has been argued that is not satisfactory that insolvent charities are treated differently based upon their form. This may be tolerable for for-profit companies, but it is not tolerable for charities because of the superior moral priority of the charitable purpose. The issue has become especially acute as it has

102 Contained in Insolvency Act 1986, s 123. 103 RW Rimel, ‘Charity and Strategy: Philanthropy’s Evolving Role’ 145(4) (Dec 2001) Proceedings of the American Philosophical Society 587.

Deploying Communitarianism Bankruptcy Theory  101 become more common for charities to take a form that does not offer the protection of rescue culture administration to charitable assets. This chapter has argued for a single treatment for all insolvent charities that use the corporate form as their organisational and structural base. That treatment should be a communitarian-based approach that seeks to satisfy multiple stakeholders and which seeks to facilitate the continued existence of the charitable purpose that the insolvent charity was created to pursue. Adapted cy-près and the full use of administration as a rescue device are the key tools to achieve this objective. This application of communitarian principles is superior to narrow liquidation approaches to insolvent charities and offers a number of distinct policy advantages, not least the continuation of charitable purposes for the benefit of numerous stakeholders and society more generally.

102

6 When should Charities be Allowed to Discriminate? The Case of Single-Sex Services and Transgender People JENNIFER SIGAFOOS1

I. Introduction Equality law and charity law have a complicated interaction in England and Wales. On the one hand, discrimination is entrenched in charities, as many define their group of service users by reference to a specific protected characteristic under the Equality Act 2010, such as sex, race, or disability. Some instances of this ‘­beneficiary discrimination’2 are allowable under the Equality Act, while others are not, as determined by a complicated framework of exceptions and schedules. On the other hand, there is an instinctive discomfort with this idea that charities are in fact discriminating by determining to whom they will provide services. Charities with restricted objects have frequently been founded by people who want to help others like themselves. This is problematic when ‘people like themselves’ are relatively advantaged in society. From a perspective concerned with a substantive idea of equality, it is more acceptable to offer all of the advantages that the state provides to charities when these potential beneficiaries possess the more vulnerable of the protected characteristics. This debate in charity law considers the question: when should it be acceptable for charities to exclude potential beneficiaries based upon a protected characteristic, and when should this be unlawful discrimination? In this chapter I will use the case of transgender women and when they are lawfully entitled to access women-only services provided by charities to illustrate 1 I thank Debra Morris and Anne Morris for letting me expand on our original study in this­ chapter. This chapter is indebted to their work on that project. I am grateful for thoughtful comments and insight on earlier drafts from Karen Atkinson, Sarah-Jane Cooper-Knock, Michelle Farrell, Anne Morris, John Picton and reviewers. Any errors remain my own. 2 D Morris, ‘Charities and the Modern Equality Framework – Heading for a Collision?’ (2012) 65(1) Current Legal Problems 295.

104  Jennifer Sigafoos the complexities of the legal framework for charities and equality law. There is considerable disagreement about the circumstances in which transgender women are entitled to access women-only services.3 I will argue that the circumstances in which charities can lawfully restrict their women-only services from transgender women are in fact quite narrow and point to some areas where the law needs clarification, in particular when a transgender woman with a Gender Recognition Certificate could be lawfully excluded from services. This situation is topical in England and Wales because of visible clashes between transgender rights activists and some feminist groups. Although previous research has suggested that charities that are in violation of the Equality Act have little to fear in terms of regulatory interventions in an era of diminished funding for both the Charity Commission and the Equality and Human Rights Commission (EHRC), it also has raised the possibility of an intervention by an interested litigant triggering a regulatory or other challenge.4 Thus, the high-profile nature of this particular (perceived by some) equality clash at the moment suggests an area where clarification of the legal position is urgently needed. I will also use the case of transgender women and women-only services as an example of why all discrimination by charities is not benign specialisation. I have argued elsewhere that the exceptions to equality law that allow charities to discriminate should be read strictly, as in effect these exceptions are importing the tests for justification of indirect discrimination (measures that are facially neutral but which have a discriminatory effect) and applying them to justify direct discrimination by charities.5 We characterised the types of discrimination that should be allowable exceptions to the Equality Act as discriminating for someone based upon a protected characteristic, rather than against them. This is essentially positive discrimination, unlawful under other circumstances. While endemic discrimination (or specialisation) may be permissible and understandable, there is also an indefinable limit to what discrimination can be allowable. There is debate about to what extent discrimination is in itself not charitable, grounded purely in charity law.6 By reference to various theoretical underpinnings that have been advanced to justify anti-discrimination and equality law, this chapter will consider the question of when this exception in equality law should permit beneficiary discrimination by charities. The extension by the Equality Act of the ­requirement that ­discrimination 3 See, eg, ‘“Shifting sands”: six legal views on the transgender debate’ The Guardian (London, 19 October 2018). 4 D Morris, A Morris and J Sigafoos, The Impact of the Equality Act 2010 on Charities (Liverpool, University of Liverpool Charity Law and Policy Unit, 2013); J Sigafoos, ‘Using Equality Legislation as a Sword’ 16(2–3) International Journal of Discrimination Law 66. 5 D Morris, A Morris and J Sigafoos, ‘Adopting (In)equality in the UK: The Equality Act 2010 and its Impact on Charities’ 38(1) Journal of Social Welfare and Family Law 14; Morris, Morris and Sigafoos, The Impact of the Equality Act 2010 on Charities (2013) (n 4). 6 See, eg, M Harding, Charity Law and the Liberal State (Cambridge, CUP, 2014) 236-240; D Morris, ‘Charities and the Modern Equality Framework – Heading for a Collision?’ (2012) (n 2); A Parachin, ‘Public benefit, discrimination and the definition of charity’, in D Jensen and K Barker (eds), Private Law: Key Encounters with Public Law (Cambridge, CUP, 2013); Parachin, ch 7.

When should Charities be Allowed to Discriminate?  105 by charities be objectively justifiable to all protected characteristics was a welcome move away from a formal, symmetrical conception of equality. I will argue that charitable discrimination should be acceptable only when it is advancing equality in a substantive way, by redressing disadvantage, challenging stigma and ­stereotype, enhancing voice and participation, or achieving social change.7 In section II, I will set the scene for charities and discrimination. Section III analyses when charitable discrimination can be justified, by way of a case study of whether (and, if so, when) charities can lawfully exclude transgender women from their services. In section IV, I will consider some of the theoretical justifications that have been advanced for equality law, to determine when charities should be allowed to discriminate. Section V will conclude the chapter.

II.  Charities and Discrimination The Equality Act 2010 requires equal treatment across a number of different activities, including work and the provision of goods and services. It prohibits discrimination, harassment, and victimisation based upon nine protected characteristics: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation. Charities have long been restricting their services based upon what we would now term a protected characteristic. For example, the Hospital of St Cross and ­Almshouse of Noble Poverty, thought to be the oldest surviving charitable institution in England,8 was founded in the twelfth century to provide accommodation for 13 elderly poor men and to feed 100 poor men daily at its gates. As well as maintaining a chapel, it still provides housing to 25 elderly men.9 In terms of service provision, it thus appears to restrict its beneficiaries to men. Compared to the common law of charity, anti-discrimination legislation is a relative latecomer to the scene, and the scope of both the Sex Discrimination Act 1975, section 43 and the Race Relations Act 1976, section 34 was restricted to not extend to charitable gifts. As noted by Watkin, ‘Discrimination has been, and still is, an accepted feature of charity’.10 This is linked to the longstanding common law freedom to discriminate in testamentary gifts or trusts, illustrated by Lord Wilberforce’s observation that: ‘Discrimination is not the same thing as choice: it operates over a larger and less personal area, and neither by express provision nor by implication has private selection yet become a matter of public policy’.11 7 Elements of S Fredman’s model of substantive equality in ‘Substantive equality revisited’ (2016) 14(3) International Journal of Constitutional Law 712, 713. 8 http://hospitalofstcross.co.uk/history/. 9 http://apps.charitycommission.gov.uk/Showcharity/RegisterOfCharities/CharityFramework.aspx ?RegisteredCharityNumber=202751&SubsidiaryNumber=0. 10 TG Watkin, ‘Discrimination and Charity’ (1981) 131 The Conveyancer and Property Lawyer 131. 11 Blathwayt v Baron Cawley [1976] AC 397, 426. This testamentary freedom to make discriminatory gifts has persisted.

106  Jennifer Sigafoos Harding argues that it would be possible to eliminate these discriminatory gifts through common law devices,12 but statute-based approaches have been preferred. Beneficiary discrimination was allowable under the predecessor equalities ­legislation13 so long as a charity could show that its charitable objects were in the public benefit. It remains lawful under the Equality Act, but the circumstances in which this is allowable have been tightened. As a result, charities must consider to what extent their often long-entrenched practices continue to be lawful. Section 193 of the Equality Act creates a specific exception for charities. They may restrict their benefits to persons sharing a protected characteristic so long as they do so in furtherance of a charitable instrument14 and the restriction is either a proportionate means of achieving a legitimate aim15 or for the purpose of preventing or compensating for historic disadvantage.16 A number of other exceptions that are not specifically restricted to charities may also allow some charities to discriminate in particular ways, such as the provision of single-sex services.17 Finally, where it is reasonably thought that persons sharing a protected characteristic suffer a disadvantage linked to that characteristic or have different needs from those who do not share the protected characteristic, or that participation in an activity by persons who share a protected characteristic is disproportionately low, then charities might engage in positive action that is a proportionate means of achieving the legitimate aim of redressing any of these situations.18 The activities, as well as the purposes, of a charity must be considered when assessing if it is acting in an unlawfully discriminatory way. The Charity Commission assesses an applicant organisation’s purposes and determines whether or not they are exclusively charitable19 in deciding if the organisation should be registered as a charity. Although a focus on charitable purposes, rather than activities, is traditionally considered to be the extent of appropriate charity law scrutiny,20 the Charity Commission regularly considers an applicant charity’s proposed a­ ctivities

12 M Harding, ‘Some Arguments Against Discriminatory Gifts and Trusts’ (2011) 31 Oxford Journal of Legal Studies 303. 13 Sex Discrimination Act 1975, Race Relations Act 1976 or Disability Discrimination Act 1995. 14 Equality Act 2010, s 193(1). 15 Ibid, s 193(2)(a). 16 Ibid, s 193(2)(b). 17 Ibid, sch 23, para 3, not considered in the body of this chapter, provides an exception from sex and gender reassignment discrimination in the case of the provision of communal accommodation, so long as the restriction is ‘managed in a way which is as fair as possible to both men and women’ (para 3(2)). This may be the justification for the direct discrimination on grounds of sex that appears to be the case for the Hospital of St Cross and the Almshouse of Noble Poverty. This exception might also affect our hypothetical charity if it offered accommodation services. 18 Equality Act 2010, s 158. 19 Charities Act 2011, s 1. 20 See Parachin, ch 7; Harding, ch 2, on ‘constitutive accountability’; J Garton, Public Benefit in Charity Law (Oxford, Oxford University Press, 2013); M Synge, The ‘New’ Public Benefit Requirement: Making Sense of Charity Law? (Oxford, Hart Publishing, 2015); Independent Schools Council [2011] UKUT 421.

When should Charities be Allowed to Discriminate?  107 as part of its determination of whether or not the purposes are c­haritable.21 ­Moreover, the Charity Commission has shown a willingness to revisit its decisions on already registered charities, both as a result of their post-registration activities22 and as a result of changing policy norms.23 The Charity Commission guidance on the Equality Act repeatedly addresses what would be considered charitable activities, rather than purposes or aims.24 In addition to charity law regulatory interventions, the EHRC could also be a potential source of regulatory enforcement, and this would extend to charitable activities, as well as purposes. Moreover, civil claims are brought against charities. There are, therefore, potential sources of both public and private sanction for discriminatory charitable purposes and activities. This chapter responds to an important question raised by a study conducted by the Charity Law and Policy Unit at the University of Liverpool in 2012–13, which was the first comprehensive exploration of the implications of the Equality Act for charities.25 The study involved 45 interviews with charities, lawyers and regulators, as well as Freedom of Information Act requests of regulators, and two stakeholder focus groups. One of the specific case studies we included in the study was that of women-only charities. We identified this case study after a number of participants in the first round of interviews with lawyers highlighted that the Equality Act was presenting a particular issue for these organisations. We then conducted two additional interviews specifically related to this case study with umbrella groups for women’s charities in the second round of interviews and also analysed a number

21 See, eg, the decision of the Charity Commission regarding the Countryside Alliance: www.gov. uk/government/publications/the-countyside-alliance (23 March 2017) para 16; Human Dignity Trust v Charity Commission for England and Wales CA/2013/0013, 9 July 2014 (FTT (Charity)). The ­Charity Commission submitted that extrinsic evidence, including about activities, was necessary where a purpose had ‘no particular meaning’ in charity law, para 18. Also of interest was the Charity Commission submission that although courts have traditionally taken a ‘benignant’ position on charitable purposes, this arose from trust law and it was ‘far from clear’ that charitable companies should also benefit, para 29; Among other commentators, Luxton has criticised the Charity Commission for ‘an improper attempt to require charities to show public benefit in their activities.’ P Luxton, Making Law? Parliament v The Charity Commission (London, Politeia, 2009) 18. 22 Hipkiss v Charity Commission for England and Wales CA/2017/0014, 23 August 2018 (FTT (Charity)). 23 In 2015 the Charity Commission approached the registered charity Gideons UK, the UK arm of the charity the Gideons International, with reference to the Equality Act 2010, querying why the charity restricted its membership to men. After taking legal advice, the charity decided to change its constitution to allow men and women to be members. The Gideons UK, The Gideons International in the United Kingdom Annual Report and Financial Statements Year ended 31 December 2017 http://apps.charitycommission.gov.uk/Accounts/Ends05/0000221605_AC_20171231_E_C.PDF. The ­Gideons International subsequently voted to reject financial support from the UK affiliate because it did not reflect the international charity’s ‘core values’. The Gideons International then challenged the Gideons UK’s usage of its international intellectual property. C Bentley, ‘Gideons UK in legal fight to keep name over women membership dispute’, Premier, 23 October 2019, www.premier.org.uk/News/ World/Gideons-UK-in-legal-fight-to-keep-name-over-women-membership-dispute. 24 Charity Commission, ‘Equality Act Guidance for Charities: Restricting Who Can Benefit from Charities’ (Charity Commission, 2013) 4.3, 5.2. 25 Morris, Morris and Sigafoos (2013) (n 4).

108  Jennifer Sigafoos of online reports and other sources of evidence related to the case study. Most of the substance of the case study was around the threat that austerity measures presented to these sources of women-only services, mainly from local authorities and other commissioning bodies requiring organisations tendering for contracts to provide services to agree to provide a universal service. Also as part of that case study, participants noted reluctance on the part of some charities providing women-only services to allow access to transgender women. In the years since the report for the study was written, the issue of transgender rights has become a frontline social debate. The 2016 Miller Enquiry into transgender equality and a consultation in 2018 on proposed changes to amend the Gender Recognition Act to allow for self-identification have further highlighted the extent of the confusion about what is lawful under the Equality Act and the concern among some charities providing single-sex services about this issue. The results of that study showed that further doctrinal investigation is essential to come to grips with this difficult issue, as is further evidenced by the current heated debate. This chapter supplies that doctrinal investigation, rather than a presentation of study findings. The case of transgender women and access to single-sex services is illustrative of the thorny issues that can present when there is a clash of rights between two protected characteristics under the Equality Act. This idea is often expressed as a hierarchy of rights. We can clearly perceive a hierarchy of rights in European Union anti-discrimination law when we consider the scope of the protections afforded under the various directives. The Race Equality Directive26 prohibits discrimination on the grounds of race or ethnic origin across a broad range of areas, including education. Various EU Directives covering sex discrimination and equal treatment of men and women in work,27 national social security systems,28 provision of goods and services29 and pregnancy30 and parental leave31 offer the next level of protection in the hierarchy but do not cover education. Discrimination based upon transgender status has been held to be discrimination based upon sex by the Court of Justice of the European Union (CJEU) and thus the protections against sex discrimination extend to transgender discrimination.32 The Framework ­Directive33 prohibits discrimination against people on grounds of disability, religion or belief, sexual orientation and age in employment. These last characteristics are therefore offered a lower level of protection than either

26 Directive 2000/43/EC. 27 The so-called Recast Directive, 2006/54/EC. 28 Directive 79/7/EEC. 29 Directive 2004/113/EC. 30 Directive 92/85/EEC. 31 Directive 2010/18/EU. 32 P v S and Cornwall County Council Case C-13/94 [1996] ECR I-2143; Richards v Secretary of State for Work and Pensions Case C-423/04 [2006] ECR I-3585; MB v Secretary of State for Work and Pensions Case C-451/16 [2018] ECLI:EU:C:2018:492. 33 Directive 2000/78/EC.

When should Charities be Allowed to Discriminate?  109 race or sex. Unlike this visible hierarchy in European anti-discrimination law, the Equality Act for the most part offers ostensibly the same protection to the same protected characteristics for the same situations, such as employment, or the provision of goods and services. Domestic law thus offers more protection than the EU ­anti-discrimination law, in some situations, because there is no explicit hierarchy of protection. It is difficult, however, to weigh up which rights to privilege when those of two protected characteristics come into opposition. Conflict arises between charity and equality law, and it is difficult for charities and their beneficiaries to navigate this legally complex area. This chapter presents a case study to illustrate this conflict. I will consider the legal position of a hypothetical charity that provides counselling services to domestic abuse survivors, a general charitable purpose under the Charities Act 2011, sub-section 3(1).34 The hypothetical charity wishes to restrict its services to cisgender women, that is, women who identify in the gender to which they were assigned at birth, rather than transgender women.35 The analysis will evaluate the charity’s position under the various mechanisms by which specific kinds of discrimination by charities and others can fall within exceptions to the prohibitions against discrimination in the provision of services under the Equality Act. This case study also raises issues about the broader justifications for charitable discrimination more generally. When does the discrimination that is endemic but permissible and understandable for charities (which I have termed ‘discrimination’, but which others might call ‘specialisation’) become ‘real’ discrimination?

III.  Justifying Charitable Discrimination In the case of a hypothetical charity that wished to limit its services to c­ isgender women, and to exclude transgender women, it is first necessary to establish if this is discrimination based upon a protected characteristic under the Equality Act. If it is discriminatory, the charity would then need to be able to justify this under an exception to the Equality Act. This might be possible under the so-called ‘charities exception’ of section 193, under the exception for separate or single-sex services, or potentially under positive action. Each of these will be considered in turn on behalf of our hypothetical charity. This area is conceptually difficult because a number of different pieces of legislation interact in the consideration of the ­question. I will conclude that only under the exception for single-sex services

34 A review of the charity register by the author suggests that it is also quite common for women’s domestic violence charities to have a secondary charitable objective of education. This particular conflict might also arise in other situations, such as religious charities in religions that require segregation of sexes. 35 At least one charity exists that meets this description: http://cisters.org.uk/. I am not familiar with its organisational structure or its position under the Equality Act.

110  Jennifer Sigafoos could this discrimination be justifiable under the Equality Act, and even then only under a very limited set of circumstances.

A.  The Protection from Discrimination Based on Transgender Status in the Delivery of Goods and Services One of the nine protected characteristics under the Equality Act is gender reassignment. The Equality Act section 7(1) describes a person sharing this protected characteristic as a ‘transsexual person’,36 defined as someone who ‘… is proposing to undergo, is undergoing, or has undergone a process (or part of a process) for the purpose of reassigning the person’s sex by changing physiological or other attributes of sex’. The process mentioned in section 7 does not need to describe a medical or hormonal process.37 It could include changing one’s name, dress or other aspects of one’s appearance. The Act prohibits direct or indirect discrimination on this ground, as well as harassment and victimisation. Although this is how transsexual is defined in the Equality Act, there is an added complication, in that the Gender Recognition Act 2004 (GRA) controls which individuals may receive a Gender Recognition Certificate (GRC), officially recognising that the individual’s legal sex has changed to that of the gender in which they identify. Individuals in possession of a GRC are entitled to protection under anti-discrimination legislation in their acquired legal sex.38 The individual must have lived in the gender in which they identify for two years and intend to do so for life.39 The process under the GRA requires that an individual has received a diagnosis of gender dysphoria.40 The GRA does not require any sort of surgical or other process to change the physical manifestations of biological sex, and thus, according to Sharpe, can be seen to ‘sever the link between sexed status and the physical body’.41 Nevertheless, Sharpe asserts that it was the clear intention of the government that surgical intervention would be the expected position, and individuals not intending to undertake surgery must justify why.42 Moreover, the change is viewed as permanent. 36 The Equality Act 2010, statutory code and non-statutory guidance use the terms ‘gender reassignment’ and ‘transsexual’. I will use these terms when referring to the legislation and code/guidance but will use the preferred terms of ‘trans’ and ‘transgender’ elsewhere. 37 As the Explanatory Notes to the Equality Act make clear at para 43: ‘A person who was born physically female decides to spend the rest of her life as a man. He starts and continues to live as a man. He decides not to seek medical advice as he successfully “passes” as a man without the need for any medical intervention. He would have the protected characteristic of gender reassignment for the purposes of the Act’. 38 AN Sharpe, ‘A Critique of the Gender Recognition Act 2004’ (2007) 4 Bioethical Inquiry 33; R Sandland, ‘Feminism and the Gender Recognition Act’ (2005) 13 Feminist Legal Studies 43. 39 Gender Recognition Act 2004, s 2. 40 Ibid, s 3. 41 Sharpe, ‘A Critique of the Gender Recognition Act 2004’ (2007) (n 38) 37. 42 Ibid, 39.

When should Charities be Allowed to Discriminate?  111 In 2018, the CJEU in MB v Secretary of State for Work and Pensions43 held that the UK had discriminated against a transgender woman who had been denied a pension at the lower state retirement age for women. The woman had been denied a GRC because she refused to have her pre-transition marriage annulled (another requirement of the GRA)44 for religious reasons. The CJEU accepted that the woman was transgender, even though she did not hold a GRC: in that regard, although … it is for the Member States to establish the conditions for legal recognition of a person’s change of gender, the fact remains that, for the purposes of the application of Directive 79/7, persons who have lived for a significant period as persons of a gender other than their birth gender and who have undergone a gender reassignment operation must be considered to have changed gender.45

The court held that this was less favourable treatment based upon sex and was discriminatory. Although the ruling is expressly limited to determinations of ­eligibility for social security,46 this may have implications for the consideration of the proportionality of any exclusions of transgender women. The definition under the GRA is more restrictive than the scope of the protected characteristic under the Equality Act. Although only persons in possession of a GRC, and possibly those similarly situated to the woman in MB in the case of social security, are entitled to protection under the protected characteristic of sex in their acquired gender, both persons who have a GRC and those who are in the process of gender reassignment but who do not yet have a GRC are entitled to protection from discrimination under the protected characteristic of gender reassignment.47 The scope of the protected characteristic of gender reassignment under the Equality Act thus offers protection to a considerably broader group of people than those who would be eligible for a GRC. This is welcome, as there are many issues identified with the certification process, leading to the government consultation in 2018 on proposed changes to the GRA, including a shift away from the requirement for a diagnosis of gender dysphoria and a move closer to self-identification.48 A particular concern with certification is that it is ultimately about something that is known (and therefore verifiable) personally. Requiring a time period as a qualifying factor for certification, moreover, means that a transgender person may

43 Case C-451/16 [2018]. 44 The European Court of Human Rights has recognised that it is allowable to make recognition of a change of gender conditional on annulling marriages. Hämäläinen v Finland (GC) App No 37359/09, July 16, 2014. 45 MB v Secretary of State for Work and Pensions Case C-451/16 [2018] para 35. 46 Ibid, para 27. 47 The Equality Act also prohibits discrimination based upon someone sharing the protected characteristic of gender reassignment even if this is only based upon a perception (whether correct or not) that a person shares that protected characteristic. 48 Government Equalities Office and Penny Mordaunt, MP, Reform of the Gender Recognition Act 2004 (London, Government Equalities Office, 3 July 2018).

112  Jennifer Sigafoos have less of a support system around them during their transition – they will be at their most exposed during a time when they are potentially the most vulnerable emotionally, physically and politically.

B.  The Charities ‘Exception’ If a charity wished to limit its beneficiaries to only cisgender women, thus engaging in direct discrimination based upon gender reassignment against transgender women (both those in possession of a GRC and those who are not), it could try to come under the exception in the Equality Act section 193, the so-called ‘charities exception’. In order to bring the discrimination within the exception, it must be in furtherance of the charitable instrument and be objectively justifiable. Harding argues that this sort of blanket exception to anti-discrimination law for charities can be regarded as part of ‘charity law’.49 To begin, the exception allowable under section 193 needs to be ‘in pursuance of a charitable instrument’. As has been interpreted to date, this would likely mean that the intention to restrict the hypothetical charity’s services only to ­cisgender, rather than transgender, women would need to be stated in the instrument establishing or governing the charity, as part of the charity’s purposes. As drawn, the restriction in section 193 is looser than that of the equivalent sections in the predecessor sex and race legislation, which referred to a ‘provision’ in the charitable instrument. Thus, there is an argument that discrimination under section 193 could be acceptable even for charities with more broadly drafted objects. The Explanatory Notes to the Equality Act indicate, however, that what was intended was to replicate and harmonise the predecessor legislation, rather than to change it.50 Prior to the Equality Act, the general charitable exception would not have required further justification, except in the case of sex discrimination. In the case of sex discrimination, the Sex Discrimination Act 1975 was amended in 2008 to comply with the EC Directive 2004/113 on equal treatment of men and women in the supply of goods and services. Section 43(2A) was inserted to impose the additional criteria that as well as the provision for the discrimination in the charitable instrument, the discriminatory treatment must be capable of objective justification, and therefore must be either a proportionate means of achieving a legitimate aim or for the purpose of preventing or compensating for a disadvantage. These two restrictions are replicated in Equality Act, section 193(2)(a) and (b). The cisgender women’s charity would therefore be required to demonstrate that its proposed discriminatory restriction in the provision of services could fall within one of these two tests.



49 Harding, 50 Equality

Charity Law and the Liberal State (n 6) 206. Act 2010, Explanatory Notes, para 611.

When should Charities be Allowed to Discriminate?  113 I will first consider the test in section 193(2)(b), compensating for disadvantage, as our study indicated that it would likely be the easier of the two tests to satisfy. This view may be shared by the Charity Commission, which refers to the section  193(2)(b) test as ‘Test A’ in its guidance.51 It would be up to the charity to establish the existence of the disadvantage it aims to remedy. The Charity Commission guidance offers examples for when the test would be satisfied. One example is that of a charity set up to address unemployment among persons of a particular nationality or ethnic origin. In order to satisfy the requirements of section 193(2)(b), the charity would need to be able to demonstrate that unemployment is ‘particularly high’ for that group as compared to the population as a whole.52 The guidance is silent as to the standard of evidentiary requirements for this. The EHRC Statutory Code of Practice on Services, Public Functions and Associations instructs that a charity would have to ‘demonstrate a reasonable connection between the past or current disadvantage experienced by this group and the benefits provided by the charity’.53 Moreover, the benefits must be ‘­capable of making a difference in terms of overcoming the disadvantage linked to the protected characteristic’.54 Our study indicated that the causal link to disadvantage can be difficult to establish and that data are inconsistently collected.55 The requirements for section 193(2)(b) would present a substantial barrier for the hypothetical cisgender women’s charity. The charity would have to show that cisgender women suffer some disadvantage that transgendered women do not. A case might be able to be made for this under section 193(2)(b) if the charity were addressing some sort of biologically linked disadvantage that cisgender women experience but trans women do not, such as cervical cancer, making the discrimination necessary. It would be more appropriate to set up a charity to address cervical cancer in this situation. Concerns about the inclusion of transgender women are most often expressed in the case of sensitive services, such as domestic violence counselling or a rape crisis centre.56 Even here, however, the evidence of disadvantage would not support excluding transgender women, who suffer violence at a high rate.57 The cisgender women’s charity would likewise have difficulty under what the Charity Commission calls ‘Test B’ – the section 193(2)(a) exception for where the proposed discriminatory treatment is a proportionate means of achieving a 51 Charity Commission for England and Wales, ‘Equality Act Guidance for Charities’ (2013) (n 24) 4.1. 52 Ibid 5.1. 53 Equality and Human Rights Commission, Equality Act 2010 Code of Practice – Services, Public Functions and Associations (London, EHRC, 2011) para 13.37. 54 Ibid. 55 Morris, Morris and Sigafoos, The Impact of the Equality Act 2010 on Charities (n 4). 56 Eg, some of the positions in ‘“Shifting sands”: six legal views on the transgender debate’ (2018) (n 3). 57 C Bachmann and B Gooch, LBGT in Britain: Trans Report (London, Stonewall, 2018): 28% of trans respondents had experienced domestic violence in the past year; 41% of trans people and 31% of non-binary people had experienced a hate crime or incident because of their gender in the past year.

114  Jennifer Sigafoos legitimate aim. The wording of this test is the same as that for justifying indirect discrimination, and the EHRC expressly makes this connection in its Code of ­Practice on Services.58 Although the wording of the provision in section 193(2)(a) and the test for indirect discrimination are the same, it is not necessarily the case that the two tests ought to be construed in the same way. The conduct being justified by section 193(2)(a) is not indirect discrimination, but rather direct discrimination, which is not normally justifiable except in the case of age. In the case of direct age discrimination, case law has established that a stricter scrutiny is appropriate in these cases where direct dissertation is being justified than would be the case for indirect discrimination. In MacCulloch v Imperial Chemical Industries plc, Elias J (as he was then) noted that the discriminatory effect of a measure that is directly discriminatory on its face will be greater than that of a measure that is facially neutral but has an indirectly discriminatory effect, and may therefore be harder to justify.59 This stricter scrutiny approach to justify direct discrimination was confirmed by the Supreme Court in Seldon.60 As section 193(a)(1) justifies direct discrimination, it is appropriate that the proportionality of the direct discrimination should also be strictly construed. In Catholic Care, the only case to consider section 193, the court chose to apply the Article 14 European Convention on Human Rights (ECHR) test instead of the section 193 test. The case began under the predecessor equality legislation. As is mentioned above, section 43 of the Sex Discrimination Act 1975 (SDA), which allowed charities to discriminate on grounds of sex, was amended by the insertion of section 43(2A) to introduce a requirement that the discrimination be included in the charitable instrument and that it be objectively justifiable, in order to comply with Directive 2004/113. In response, Catholic Care attempted to amend its Memorandum of Association to expressly limit its provision of adoption services to married heterosexual couples (same-sex marriage was not yet provided for), a practice that it had followed before the change in the SDA. The Charity Commission refused permission, on grounds that it would not fall within the charity exception. An appeal by the charity to the Charity Tribunal was unsuccessful. On further appeal, Briggs J in the High Court remitted the case to the Charity Commission. Briggs J said that the amendment ‘was introduced to bring the express terms of section 43 into compatibility with Convention rights, and with Article 14 in particular’.61 By this reasoning, all of the exceptions in the predecessor equality legislation required objective justification after the implementation of the Human Rights Act 1998; a surprising result. This framing led Briggs to formulate the question remitted to the Charity Commission as whether the revised charitable objects sought by Catholic Care would be justifiable under Article 14. This is potentially 58 EHRC, Equality Act 2010 Code of Practice (2011) (n 53) para 13.36. 59 [2008] IRLR 846 (EAT). 60 Seldon v Clarkson Wright and Jakes (a Partnership) [2010] UKSC 16, [2012] 3 All ER 1301. 61 Catholic Care (Diocese of Leeds) v The Charity Commission for England and Wales [2010] EWHC 520 (Ch), [2010] 4 All ER 1041 [51].

When should Charities be Allowed to Discriminate?  115 problematic, as what can be objectively justified under Article 14 may be broader in circumstances where the European Court of Human Rights (ECtHR) affords to states a wide margin of appreciation.62 Although it has been the case so far that, on the particular facts, the approach would have been the same,63 this is not necessarily so. The use of the ECtHR jurisprudence may thus be ill-suited as a basis for Charity Commission determinations in some circumstances where there is a wide margin of appreciation afforded to states. In Catholic Care, Briggs further deployed the case law and language of the ECtHR on Article 14, noting that discrimination based upon sexual orientation requires particularly weighty and convincing reasons to be justifiable. He cited Kozak v Poland64 for the proposition that the state’s margin of appreciation is narrow in such cases and that the proposed discriminatory measure used to meet the legitimate aim must be necessary, as well as suitable. When the matter returned to it, the Charity Commission again decided that Catholic Care could not change its objects, concluding that the charity had not provided ‘sufficiently convincing and weighty reasons’ to justify the discrimination.65 This was affirmed in the now renamed First-tier Tribunal (Charity) (the FTT) and then appealed to the Upper Tribunal (Tax and Chancery Chamber) (the UT), where Sales J upheld the FTT and again considered justification under Article 14, noting that ‘… it is unnecessary to examine further the precise basis on which Article 14 principles come to infuse the interpretation of section 193’, although ‘… on any view, Article 14 provides a powerful analogy for the operation of section 193’.66 This suggests that future considerations of whether or not charities can be allowed to discriminate will focus more on the case law derived from indirect discrimination, rather than the Equality Act and directives. In the UT, Sales J agreed with Catholic Care that placing hard-to-adopt children was a legitimate aim, but he did not agree that the means pursued were proportionate. Notably of interest to the cisgender women’s charity was Sales J’s willingness to entertain the argument that the availability of services for same-sex couples elsewhere might be considered in the calculation of objective justification of the discriminatory practice of limiting services to heterosexual couples. He said that although availability of services elsewhere would not ‘of itself justify’ the practice, it could be relevant ‘in some circumstances’.67 ­Catholic  Care’s

62 See, eg, Homer v Chief Constable of West Yorkshire Police [2012] UKSC 15, [2012] ICR 704, [2012] All ER 1287 [23] (Lady Hale). 63 See, eg, Hackenjos v Secretary of State for Social Security [2004] EWCA Civ 1749, [2005] EuLR 385; Humphreys v HM Revenue and Customs [2010] EWCA Civ 56, [2010] 1 FCR 630. 64 [2010] ECHR 280 (92). This language is repeated in the Charity Commission, ‘Equality Act ­Guidance for Charities’ (2013) (n 24) para 5.5. 65 Charity Commission for England and Wales, ‘Catholic Care (Diocese of Leeds), decision made on 21 July 2010, Application for consent to a change of objects under s 64 of the Charities Act 1993’ (London, Charity Commission, 2010). 66 Catholic Care (Diocese of Leeds) v Charity Commission [2012] UKUT 395 (TCC) [13]. 67 Ibid [28].

116  Jennifer Sigafoos services ‘do not dominate the public sphere in relation to the activity in ­question –­ provision of adoption services – which are otherwise widely available to homosexuals and same-sex couples’.68 This is troubling, as it is analogous to the arguments seen in Bull v Hall and Preddy that the same-sex couple could simply seek accommodation elsewhere.69 Sales J nevertheless concluded that the provision of services elsewhere, although possibly reducing the detrimental effect: did not remove the harm that would be caused to them through feeling that discrimination on grounds of sexual orientation was practiced at some point in the adoption system nor would it remove the harm to the general social value of promotion of ­equality of treatment for heterosexual and homosexuals – a value endorsed by Parliament in assessing and responding to the needs of society by legislating general rules to promote quality of treatment for homosexuals.70

Thus, the availability of the service itself is really only a piece of the puzzle, and the fact of the discrimination itself is important, both to the individuals who are discriminated against, and to broader society. The harm caused by the existence of the discrimination tips the calculation of proportionality against the discrimination. Sales J also stated that the motivation of donors to the charity might also be capable of being relevant to calculating proportionality under Article 14, particularly where they ‘are motivated by sincerely held religious beliefs in line with a major tradition in European society such as that represented by the doctrine of the Catholic church’.71 This is one of the areas where the argumentation under ­Article  14 in Catholic Care is problematic. Benign motive cannot be a defence to direct discrimination, and the section 193 exception is justifying direct ­discrimination.72 A charity could always argue that it is operating in pursuance of a recognised charitable purpose and in the public benefit, and that therefore this is benign motivation. The acceptance of a purpose as charitable would provide the justification of the reasonableness of the benign motivation, as the ‘major tradition’ of Catholicism does for Sales J in the case of Catholic Care. Nevertheless, both European and domestic lawmakers have placed limits on the ability of charities to discriminate. To allow the discrimination because the motivation is benign would, in the case of charities, effectively read out the limitations of section  193. This, however, is one of the difficulties of balancing equality law. Religion is a protected characteristic, so the beliefs that motivated the charity in Catholic Care are protected. This then sets up conflicts with other equality strands, such as sex discrimination or gender reassignment. Whose interests ought society to privilege then?



68 Ibid

[44]. EWCA Civ 83, [2012] 2 All ER 1017. 70 Catholic Care (Diocese of Leeds) v Charity Commission [2012] UKUT 395 (TCC) [66]. 71 Ibid [44]. 72 Amnesty International v Ahmed [2009] IRLR 884 (EAT). 69 [2012]

When should Charities be Allowed to Discriminate?  117 Applying Catholic Care to the situation of the hypothetical cisgender women’s charity considered in this case study, the charity may be able to establish that providing services to cisgender women is a legitimate aim. It cannot be the case that section 193(2)(a) requires that cisgender women be at a greater disadvantage than the general public, because if that were the case then section 193(2)(b) would apply, robbing section 193(2)(a) of meaning. Therefore, providing support to cisgender survivors of domestic violence might be a legitimate aim, even if it were not possible to establish that cisgender women are subjected to domestic violence at a greater rate than the general public or transgender women. The Charity Commission’s guidance on ‘Test B’ would indicate otherwise, however, stating that a legitimate aim ‘has a reasonable social policy objective … is consistent with the lawful carrying out of the charity’s stated purpose for the public benefit … and is not itself discriminatory’.73 This guidance seems rather circular as, if the objective were not itself discriminatory, there would be nothing to justify via section 193(a). The EHRC’s Statutory Code of Practice on Services, Public Functions and Associations states that ‘the restriction would need to promote, or in any event not inhibit, the achievement of one of its stated aims’.74 Even were this to be a legitimate aim, however, proportionality would require sufficiently weighty justification, which would be difficult for the cisgender charity to meet. There are fundamental problems with the arguments that are made to justify this position, as they accept premises that should be challenged. First, the case for a blanket exclusion of transgender women suggests that they will look like men, and that this might be ‘triggering’ or distressing for cisgender women service users of sensitive services such as domestic violence counselling. It is not the case that all transgender women look like men, and even if it were, then this argument would seem to require that any cisgender women who do not look ‘womanly’ be excluded as well. Secondly, it assumes a uniformity and safety among c­ isgender women that is always greater than those between cisgender and transgender women, which is problematic. The government consultation points to potential circumstances that challenge this construction: ‘for example the refuge might want to prevent an abusive lesbian from entering when her abused female partner is inside, or it may exclude a woman with a history of violence and instability’.75 The argument is sometimes justified on the basis that abusive cisgender men will pretend to be transgender women in order to access these services and abuse women.76 It is entirely disproportionate, however, to deny services to a vulnerable population group on the chance that another population group entirely might try and abuse the existence of the vulnerable population group in order to commit crimes. 73 Charity Commission, ‘Equality Act Guidance for Charities’ (2013) (n 24) para 5.4. 74 EHRC (2011) (n 53), para 13.36. 75 Government Equalities Office and Penny Mordaunt, MP, (2018) (n 48), 45. 76 Eg, M O’Hara, ‘Wishful thinking is not a good foundation for law’ in ‘“Shifting sands”: six legal views on the transgender debate’ The Guardian (London, 19 October 2018).

118  Jennifer Sigafoos By way of analogy to Catholic Care, the harm of the discrimination to the transgender potential service users who are denied services would be equivalent to that noted in the case by Sales J. There would also be harm to society by allowing the discrimination, violating the general social value of equal treatment, a value endorsed and protected by Parliament. These harms would weigh against the charity in any proportionality calculation. Moreover, it may well be the case that services are not generally available elsewhere for transgender women survivors of violence in need of counselling. These resources are generally stretched thin throughout the country. Despite the focus on Article 14 in Catholic Care, section  193 is justifying direct discrimination and must, therefore, be strictly construed. It is disproportionate to allow a charity to exclude all transgender women.77

C.  Single-Sex Services The discussion of section 193 applies if the charity in question would like to restrict its charitable purposes to cisgender women. It may be the case, however, that a charity wants to restrict only some of its services or charitable activities to cisgender women. The charity could not then rely on section 193, as the restriction would not be in furtherance of its charitable instrument. Charities with more general charitable objects would have to rely upon different exceptions to the Equality Act. There are a number of exceptions in the Equality Act, some of which are relevant to this chapter, including the exceptions in schedule 3, part 7, paragraph 27, for the provision of services differently to different sexes, including separate but the same services, separate and different services, and services only to one sex. The Sex Discrimination Act 1975 allowed charities to provide services and benefits to one sex if that was why the organisation had been set up.78 The Equality Act permits single-sex services where they fall within context-dependent circumstances, such as where only persons of that sex need the service;79 where the service would be insufficiently effective were it to be provided jointly to both sexes;80 or where a service would be used by two or more persons at the same time and a person of one sex might ‘reasonably object’ to the presence of a person of the opposite sex.81 In all of these instances, however, the limited provision of the service must also be a proportionate means of achieving a legitimate aim.82

77 It would also be a violation of the Charity Commission’s own Public Sector Equality Duty, Equality Act 2010 s 149, to register a discriminatory charity that cannot fall within s 193. 78 Sex Discrimination Act 1975, s 43. 79 Equality Act 2010, sch 3, part 7, para 27 (2). 80 Ibid, para 27 (3)(b). 81 Ibid, para 27 (6)(a) and (b). 82 Ibid, para 27 (1)(b).

When should Charities be Allowed to Discriminate?  119 The Equality Act also permits the exclusion of persons on grounds of gender reassignment in the provision of separate and single-sex services, so long as it can be objectively justified.83 It is clear that this is not the expected state of affairs, as the EHRC’s guidance states: Generally, a business which is providing separate or single-sex services should treat a transsexual person according to the sex in which the transsexual person presents (as opposed to the sex recorded at birth), as it is unlawful to discriminate against someone because of gender reassignment.84

The circumstances in which the exclusion of transgender persons would be a legitimate aim are not explicitly listed, as they are in the case of separate and single-sex services for males and females. The grounds that would be considered acceptable to be a legitimate aim are likely to be similar.85 Therefore, under the current legal configuration, it would be likely to be a legitimate aim for a service provider to exclude transgender persons if the service would be less effective if they were included; if the service might be used by both cisgender and transgender persons at the same time and the cisgender persons could reasonably object to the presence of transgender persons; or if there would likely be physical contact between service users and service users could reasonably object to the presence of the transgender person. The Explanatory Notes to the Equality Act offer the following example: ‘A group counselling session is provided for female victims of sexual assault. The organisers do not allow transsexual people to attend as they judge that the clients who attend the group session are unlikely to do so if a male-to-female transsexual person was also there. This would be lawful’.86 Another potential example is that of a women’s refuge for survivors of violence, or a rape crisis centre, where the service might be less effective or other service users might reasonably object to the presence of transgender women as service users.87 Even though these may be legitimate aims for the service provider, it would nevertheless be necessary to determine if the exclusion of the transgender person in these circumstances is proportionate. McCann noted that the example in the Explanatory Notes was ‘drafted too categorically’.88 The women’s refuge or rape crisis centre would therefore need to be able to evidence that their service would be less effective if opened up to transgender women or that their cisgender service users would object to the presence of transgender women. This would align with 83 Ibid, para 28. 84 EHRC, What Equality Law Means for Your Business (London, EHRC, October 2018) 17. Amended in October 2018. The earlier guidance stated the case more categorically, until pressure from a feminist campaign. 85 Claire McCann, ‘Legal Opinion in the matter of The Women & Equalities Committee’s Inquiry into Transgender Discrimination and the Equality Act 2010’, 10 November 2015 (http://data.parliament. uk/writtenevidence/committeeevidence.svc/evidencedocument/women-and-equalities-committee/ transgender-equality/written/24915.pdf) 5. 86 Equality Act 2010, Explanatory Notes, para 740. 87 McCann, ‘Legal Opinion’ (2015) (n 85). 88 Ibid.

120  Jennifer Sigafoos the need to substantiate other charity exceptions with evidence, as discussed above. The service provider would also need to assess the circumstances of each potential transgender service user to determine how proportionate the exclusion would be in that individual’s case.89 As is discussed above in relation to the proportionality of barring all transgender women, the premise on which these arguments are founded is flawed. A blanket ban on transgender individuals using a single-sex service would be unacceptable under the Equality Act. In the case of potential service users who hold a GRC, the grounds justifying their exclusion would need to be weightier in order for the exclusion to be ­proportionate.90 Transgender women with a GRC have lived in their acquired gender for a number of years and undergone a lengthy legal process involving medical assessments. Their sex has legally been changed to that of their acquired gender. It is logical that their exclusion from single-sex services is only objectively justifiable based upon particularly serious grounds. It is not clear what circumstances can justify the exclusion of transgender women who hold a GRC from single-sex services. In the 2018 government consultation document it was noted that, ‘The fact a trans person has legal gender recognition will form part of a service provider’s decision as to whether to provide a different, or even no service to a trans person, but having a GRC is not a complete answer’.91 In response to consultation, there were repeated arguments that allowing a GRC only based upon self-identification would erode the protection of women-only spaces.92 This is a misreading of the impact of changes to obtaining a GRC. Although at present the reasons required to objectively justify excluding a transgender woman with a GRC would have to be weightier than would be required for a woman without a GRC, this is both because of the legal status conferred by the GRC and because a GRC is evidence of commitment. When weighing up the risk of admitting an individual to a women-only service, the GRC is evidence that this individual has been not only identifying as a woman, but living as a woman, for a long time. We can see from the CJEU in MB that even in the absence of a GRC, the facts of a particular case may be such as to warrant an assumption that a woman is transgender and that she is experiencing discrimination based upon sex.93 Some of the more heated argumentation from those who are opposed to reforming the 89 In its response to a petition about proposed changes to the GRA, ‘Consult with women on proposals to enshrine “gender identity” in law’ (https://petition.parliament.uk/petitions/214118), the Government Equalities Office affirmed that the risk assessment would have to be made for each individual: ‘Providers of women-only services can continue to provide services in a different way, or even not provide services to trans individuals, provided it is objectively justified on a case-by-case basis’. This affirms the argument that a blanket ban on transgender individuals using a single-sex service would be unacceptable under the Equality Act. 90 McCann, (2015) (n 85). 91 Government Equalities Office and Mordaunt, (2018) (n 48), 45. 92 See, eg, some of the positions in ‘“Shifting sands”: six legal views on the transgender debate’ (2018) (n 3). 93 MB v Secretary of State for Work and Pensions Case C-451/16 [2018] para 35.

When should Charities be Allowed to Discriminate?  121 GRA is around the risk of male predators declaring themselves to be transgender in order to access women-only spaces in order to prey upon the other service users.94 A service can already exclude any person, whether cisgender or transgender, if they pose a risk to other users of the service. There is evidence that many services have found ways to accommodate transgender women.95 In this investigation of whether charities can exclude transgender women from single-sex services we come, therefore, to the very lawyerly answer of: it depends. A blanket ban on transgender women accessing single-sex services is not lawful. It will be lawful to exclude a particular transgender woman if this discrimination can be objectively justified. A charity should consider each transgender woman on a case-by-case basis in assessing whether it is proportionate to exclude her from services. This is likely to be the case in only a limited number of cases. In the case of a transgender woman with a GRC, those reasons will need to be considerably weightier in order to be proportionate.

D.  Positive Action The final mechanism that might allow charity to limit its services is positive action. Positive action may be used when a group defined by one or more protected characteristics are disadvantaged or subject to systematic discrimination. Positive action is allowable under the Equality Act if it is reasonably thought that persons who share a protected characteristic are disadvantaged in a way linked to the protected characteristic, if persons who share a protected characteristic have needs that are different from the needs of those who do not share it, or where participation is particularly low on the part of those who share a protected characteristic.96 In those instances, members of the group who share the protected characteristic may be treated more favourably than others in order to enable them to overcome or minimise the disadvantage, to meet the needs, or to increase participation, so long as this is a proportionate means of achieving a legitimate aim.97 Due to the essentially symmetrical nature of the equality law in the UK, there were few opportunities for positive action, compared with that allowable in the US and in other EU Member States, until quite recently.98 Positive action is limited in scope. As it must be ‘reasonably thought’, there must be some evidentiary basis for the determination that a particular group needs to be privileged over others. ­Positive action also must be time-limited, so a charity could not rely on this as to

94 M O’Hara, ‘Wishful thinking is not a good foundation for law’ (2018) (n 76) is an excellent­ example of this argument. 95 Stonewall and NfP Synergy, Supporting trans women in domestic and sexual violence services (London, Stonewall, 2018). 96 Equality Act 2010, s 158. 97 Ibid. 98 A McColgan, Discrimination, Equality and the Law (Oxford, Hart Publishing, 2014) 71.

122  Jennifer Sigafoos allow the discrimination forever. Finally, if the positive action has been pursued for a period of time and there is no improvement in the situation of the disadvantaged group, then it is likely that the positive action would be viewed as a less-thanproportionate response and therefore not justifiable. Positive action is unlikely to help the hypothetical charity. A greater need for the services of counselling might be viewed as a disadvantage linked to the protected characteristic of sex, as women are more likely to be subject to domestic violence. It is, however, also a disadvantage linked to the protected characteristic of gender reassignment. Again, it would not be proportionate to exclude transgender women to compensate for this disadvantage.

IV.  When should Charities be able to Discriminate? The complicated interaction between charity law and equality law is illustrated by the case study. Much of the discussion involved calculating when discrimination is proportionate and therefore objectively justifiable. These calculations may be informed by reference to the principles underpinning equality and antidiscrimination law. In this section I will address when it should be lawful for charities to discriminate. This discussion is primarily focussed on discriminatory purposes for charities, such as could be permitted under the section 193 exception, but calls to the principles underpinning equality law also could be useful for the balancing calculations under other exceptions for discriminatory charitable activities.

A.  What about Public Benefit? All charities must act exclusively in the public benefit. It is generally agreed that discrimination causes public harm, and the public is benefited by the promotion of diversity. How, then, can it be in the public benefit for a charity to discriminate? Others have argued that discrimination is incompatible with public benefit.99 ­Parachin disagrees, calling this ‘an aspirational argument about what public benefit could and perhaps even should come to mean.’100 Government rejected an opportunity to link public benefit and a lack of discrimination in the charity law reform process that led up to the passage of the Charities Act 2006.101 Could a charity that fails to justify its discrimination be in the public benefit? The indication at present

99 See, eg, Harding, Charity Law and the Liberal State (2014) (n 6) 236–240; Morris, ‘Charities and the Modern Equality Framework – Heading for a Collision?’ (2012) (n 2). 100 Parachin, ‘Public benefit, discrimination and the meaning of charity’ (n 6), 173. 101 Joint Committee on the Draft Charities Bill, The Draft Charities Bill (2003-04 HL 167-III, HC 660-III) vol 3: Written evidence, memorandum from Peter Tatchell (DCH 92) Ev 377.

When should Charities be Allowed to Discriminate?  123 in England and Wales is no. The Charity Commission will consider the impact of any restriction in a charitable instrument based upon a projected characteristic and whether it can be justified in determining whether a charity passes the public benefit test.102 If the class of persons to benefit is unreasonably restricted then it will not constitute a ‘sufficient’ section of the public and will, therefore, not be in the public benefit.103 In its guidance for charities on the Equality Act, the Commission conflates the Equality Act requirements and public benefit. If a would-be charity is unable to justify discrimination based upon a protected characteristic under section 193, the Commission may not be able to register the organisation, ‘as it is unlikely to be able to show that it is for the public benefit’.104 The EHRC advanced this argument in its intervention in the Catholic Care litigation, although the Tribunal was not inclined to accept it.105 The argument is rather circular, however. If a would-be charity cannot satisfy section 193 to justify its discrimination, then it is not acting in the public benefit. If an entity does not meet the public benefit test, then it is not a charity and cannot rely on section 193 to justify the discrimination. At any rate, reference to public benefit without more does not provide much in the way of insight into when this discrimination is objectively justifiable.

B.  Principles of Equality Law When considering what the limits should be for when charitable discrimination can be justified, it may be useful to consider the theoretical underpinnings for equality law. If we can situate the sort of specialisation that charities undertake within equality law, then we may gain some insight into when these charitable purposes are objectively justifiable discrimination. Although a right to equality ‘is a central commitment in human rights law … the meaning of the right to equality is deeply contested’.106 There is reasonably broad agreement that such a right must involve more than formal equality – the Aristotelian conception of treating like cases alike. Barnard and Hepple describe this as ‘a notion of procedural justice which does not guarantee any particular outcome’.107 A person or entity in a position of power would be free to treat both

102 Charity Commission, ‘Public benefit: the public benefit requirement (PB1)’’ (London, Charity Commission, 2014) 11. 103 Ibid; See Parachin, ‘Public benefit, discrimination and the meaning of charity’ (n 6) for an argument that prohibitions against discrimination grounded in charity law must arise from the ‘benefit’ element of public benefit, rather than the ‘public’ element that the Charity Commission is relying on here. 104 Charity Commission, ‘Equality Act Guidance for Charities’ (2013) (n 24) para B2. 105 Father Hudson’s Society and another v Charity Commission (Equality and Human Rights Commission intervening) (2009) PTSR 1125. 106 Fredman, ‘Substantive equality revisited’ (2016) (n 7). 107 C Barnard and B Hepple, ‘Substantive Equality’ (2000) 59(3) Cambridge Law Journal 562, 563.

124  Jennifer Sigafoos men and women, for example, equally poorly – there is no normative power in the term beyond the idea of intergroup fairness.108 This problem arises, at least in part, because of the largely symmetrical nature of English equality law, where once a characteristic is identified as worthy of protection from discrimination, all groups are protected from discrimination based upon that trait. Formal equality is not, therefore, a very satisfactory framework, as it would restrict the sort of measures to address inequality where people who have been disadvantaged are accorded more favourable treatment in order to improve their position. We can see that the Equality Act has departed from formal symmetrical equality for charities, with the addition of the requirement that discrimination by charities must be ­objectively justifiable across all protected characteristics, rather than limited only to the protected characteristic of sex, as was the case previously. What, then, should equality law be for? McCrudden noted that there was no one source or organising principle for notions of equality or non-discrimination in English public law, the concept of equality therefore being ‘essentially pluralistic in its sources, in its origins, in its meaning, in its application, and in its functions’.109 McCrudden has also suggested considering equalities, rather than equality, as there is no one complete notion of the concept.110 Formal equality is often contrasted with substantive equality, though this also does not have an agreed definition. Fredman argues that a substantive idea of equality ‘would only be suspicious of groups who are excluded because of, or in spite of, their especial vulnerability’.111 Young suggests that the groups who should be protected by equality law are those where the members experience systematic or structural disadvantage across multiple spheres.112 This then would be consistent with a concept that charities may choose to limit their beneficiaries by reference to a protected characteristic, but only where the charity is helping the more disadvantaged side of the symmetrical grouping: women rather than men, for example. In the case of transgender women, equality law is suspicious of a charity that excludes transgender people because of their special vulnerability. Perhaps we can use the degrees of vulnerability of various protected groups to decide which should be protected over the other.

C.  Substantive Equality Vickers classified three conceptual approaches to this deeper or more substantive understanding of equality: linked to removing disadvantage, individual dignity and 108 See P Westen, ‘The Empty Idea of Equality’ (1982) 95(3) Harvard Law Review 537. 109 C McCrudden, ‘Equality and Non-Discrimination’ in D Feldman (ed) English Public Law (Oxford, OUP, 2004). 110 C McCrudden, ‘Thinking about the discrimination directive’ (2005) 1 European Anti-Discrimination Law Review 17. 111 S Fredman, ‘Providing Equality: Substantive Equality and the Positive Duty to Provide’ (2005) 21 South African Journal of Human Rights 163, 170. 112 IM Young, ‘Equality of Whom? Social Groups and Judgments of Injustice’ (2001) The Journal of Political Philosophy 1, drawing on Michael Walzer’s theory of complex equality.

When should Charities be Allowed to Discriminate?  125 recognition, and a broader approach that she terms inclusion and ­participation.113 Of these, removing disadvantage is conceptually easy to understand. It would hold that the point of equality law is to remove disadvantage associated with discriminatory treatment, or historical discriminatory treatment, based upon a protected characteristic. A concern with this basis is the need to evidence disadvantage, which was also raised by the study. Participants identified that the data which could provide evidence to justify positive action, or the section 193 charity exception, were generally not collected and therefore it was difficult to rely on the exception in any practical way. Despite these evidentiary issues, it is uncontroversial that discrimination designed to address past disadvantage is justifiable under section 193(2)(b). These are the situations that are likely to come most readily to mind when thinking of charity. This is also possibly why the Charity Commission refers to the test under section 193(2)(b) as Test A. Preferential treatment designed to redress disadvantage is the classic situation for justifiable charitable discrimination. The second of Vicker’s clarifications, dignity or recognition, is an appealing basis for these more substantive ideas of equality. We can find dignity used as a first principle of equality and human rights in a number of different sources, including the Universal Declaration of Human Rights.114 This concept has also been expressed as ‘recognition’; inequality can also arise from individuals’ personal identity and self-worth not being sufficiently valued.115 Dignity as a basis for equality should help to prevent ‘levelling-down’, where protections for all are dropped to the lowest common denominator rather than raised, in order to comply with a symmetrical approach to protection. Dignity has also been criticised as a ground for equality law, however, with Feldman noting that dignity is a ‘quality characteristic of human beings, so that an individual cannot have a right to it’.116 The addition of dignity to interpretation of the slippery concept of equality adds little in the way of analytical traction. At times, it has proved a false friend to those who would advance a more substantive concept of equality. In Canada, the prevention of ‘the violation of essential human dignity and freedom’117 was defined by the Supreme Court in Law v Canada as the purpose of the equality guarantee in section 1(1) to Canada’s Charter of Rights.118 Subsequently, in G ­ osselin v Quebec

113 L Vickers, ‘Promoting Equality or Fostering Resentment? The Public Sector Equality Duty and Religion and Belief ’ (2011) 31(1) Legal Studies 135. I have reordered these for purposes of this discussion. 114 ‘All human beings are born free and equal in dignity and rights.’ Universal Declaration of Human Rights, Art 1. 115 For a sceptical take: N Fraser, ‘From Redistribution to Recognition? Dilemmas of Justice in a “­Post-Socialist” Age’ (1995) 212(1) New Left Review 68. 116 D Feldman, ‘Human Dignity as a Legal Value: Part 1’ (1999) Public Law 682, 682. 117 Law v Canada (1991) 1SCR 497, para 51. 118 ‘Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.’ Canada’s ­Charter of Fundamental Rights, s 15(1).

126  Jennifer Sigafoos (Attorney General),119 the Supreme Court deployed the idea of dignity as an ­additional hurdle to surmount for younger social security claimants trying to assert that higher rates paid to those aged 30 and over violated the section  15 equality guarantee.120 This risk had been raised by Grabham, who pointed out that ‘one could conceivably be dignified and materially disadvantaged’.121 In R v Kapp the Canadian Supreme Court acknowledged the contribution that human dignity, as incorporated by the Law court, had added to ‘understanding of the conceptual underpinnings of substantive equality’ but that nevertheless difficulties had arisen from its use ‘as a legal test’.122 Vickers argues that ‘the reifying of difference’ between groups is another shortcoming of dignity as a basis for equality claims, particularly in the area of religion and belief, where the boundaries are unclear and ‘the range of voices within religious groupings so varied’.123 In considering how to weigh up the hierarchy of protection in a reworked equality law structure for the UK, McColgan would relegate religion or belief to a lower level of protection than that afforded sex, race, disability or sexual orientation, except where it is serving as a proxy for ­ethnicity.124 It can be seen from the Catholic Care litigation that there is tension between modern charity law and the practices of some religious groups. Religion was one of the traditional four heads of English charity law,125 and yet it is an area where there is controversy about charitable status in the modern era. Dignity or recognition does seem conceptually similar to the ideas invoked by Sales J in Catholic Care as to when and why discrimination is harmful for individuals and broader society. In the case of transgender women, recognition or dignity is a key conceptual issue. To be ‘misgendered’ or ‘deadnamed’ is an assault.126 Exclusion from services for transgender women is misgendering that woman by treating her as if she had not acquired her new gender. This is an assault on the dignity of the transgender woman. Dignity or recognition might thus be a helpful concept when considering whether discrimination can be justified in the case of transgender. Vickers noted that some theoretical conceptions for equality law may be better suited to different protected characteristics.127 119 (2002) 4 SCR 429. 120 The majority required that the plaintiff demonstrate that the disparate treatment based upon a protected ground (age) was irrelevant to the legislative purpose, which was declared to be promoting autonomy for younger adults. This deference to the legislative purpose effectively meant that the plaintiff would have to show both the discriminatory impact and also that this was intended to violate the dignity of younger people. 121 E Grabham, ‘Law v Canada: New Directions for Equality under the Canadian Charter?’ (2002) Oxford Journal of Legal Studies 641, 654, cited in McColgan, Discrimination, Equality and the Law (2014) (n 98). 122 (2008) 2 SCR 483, paras 20–21. 123 Vickers, ‘Promoting Equality or Fostering Resentment?’ (2011) (n 114), 150. 124 McColgan, Discrimination, Equality and the Law (2014) (n 98), 230. 125 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531. 126 K McLemore, ‘Experiences with Misgendering: Identity Misclassification of Transgender ­Spectrum Individuals’ (2014) Self and Identity 14(1); Stonewall, The truth about trans: A Q&A for people who are hungry for real info (www.stonewall.org.uk/truth-about-trans). 127 Vickers, (2011) (n 114).

When should Charities be Allowed to Discriminate?  127 The last of Vicker’s classifications is the inclusive model, which would address both recognition and redistribution. There are many models of what equality law is for that would fall into this category. O’Cinneide argues that equality and anti-discrimination law are intended to tackle a variety of different harms and so therefore it could be impossible to distil the concepts down to a single underlying harm. The ultimate aim of equality and anti-discrimination law is ‘as a tool to help achieve some sort of social transformation’.128 Fredman elaborated a ‘four dimensional principle’ for substantive equality: ‘to redress disadvantage; to address stigma, stereotyping, prejudice and violence; to enhance voice and participation; and to accommodate difference and achieve structural change’.129 If we are to consider when a charity should be able to justify discrimination under these models, we see that it would be in situations when a charity is challenging social structures that perpetuate inequality.

V. Conclusion This chapter has focused on a legal flash point in the UK at the moment. The consultation on potential changes to the GRA has led to debate about whether and when transgender people should be able to access single-sex services in the gender in which they identify. Charities that offer these services would do well to consider their policies for including transgender people, to determine whether they are lawful. If a charity’s policy is framed as an exclusion policy, it is unlikely to be lawful. I have demonstrated the complex interrelationship between charity and equality law. The section 193 Equality Act requirement that discrimi­nation be justifiable across all protected characteristics was a positive step. As UK equality law is largely symmetrical, this additional justification requirement is necessary to ensure that charitable discrimination is achieving more than a formal ideal of equality. I have argued that because section 193 is justifying direct discrimination, rather than indirect discrimination, it should be construed strictly. The experience of being directly discriminated against is invidious and the justification required to make this lawful should be correspondingly stringent. Charities have favoured status from the state and, therefore, should be held to a higher standard to justify their discriminatory practices.

128 C O’Cinneide, ‘Fumbling Towards Coherence: The Slow Evolution of Equality and Anti-Discrimination Law in Britain’ (2006) 57 Northern Ireland Law Quarterly 57, 60. 129 Fredman, ‘Substantive Equality revisited’ (2016) (n 7) 713. MacKinnon, in response, argued that the single principle Fredman was missing is that of ‘social hierarchy’. C MacKinnon, ‘Substantive Equality Revisited: A Reply to Sandra Fredman’ (2016) 14(3) International Journal of Constitutional Law 739, 740.

128  Jennifer Sigafoos I examined three possible mechanisms by which a charity might lawfully be able to limit its services to only cisgender women, and I concluded that the exception for single-sex services was the only viable option. A charity would not and should not be able to issue a lawful blanket ban on all transgender women, however. Each individual would need to be assessed on a case-by-case basis. These assessments would need to be based upon evidence, rather than assumptions. The reasons required to exclude a transgender woman with a GRC would need to be correspondingly weightier than for those without. This is true both because a transgender woman with a GRC has legally changed her sex, but also because a GRC will be evidence of her long-term commitment to living in her acquired gender. This must tip the scales of proportionality away from exclusion in these cases, in all but a handful of circumstances.130 Finally, I looked to the theoretical underpinnings that have been offered in support of normative ideals of equality and anti-discrimination law to see if they offered any further insight into when it should be allowable for a charity to discriminate. The theory underlying equality and anti-discrimination law is deeply contested. That said, we were able to gain some insight into when charitable discrimination should be able to be justified. In terms of discrimination that redresses disadvantage under section 193(2)(b), this should be straightforward. As there is now a general consensus that equality law is striving for more than formal equality, tackling disadvantage is a noncontroversial goal for both discrimination law and charities. When deciding what could be a proportionate means of achieving a legitimate aim under section 193(2)(a), considering the theoretical bases for equality law offered that this should only be allowable when the discrimination is in favour of the vulnerable. Although symmetrical equality law offers protection to all the cognate groups of a protected characteristic, it would not be acceptable to focus on the relatively advantaged at the expense of the relatively disadvantaged. This is not what equality law is for. Charities should be making a difference by tackling the additional elements of Fredman’s model, by combating stigma and stereotyping, enhancing voice and participation, accommodating difference and achieving social change.131 The discrimination against transgender women discussed in this chapter meets none of these circumstances and is unacceptable. Charitable discrimination should be able to be justified when it is operating as a tool for social transformation.132 That should be the point of charity and the point of equality law.

130 This is likely to also be the case where a woman fits the circumstances of the plaintiff in MB v ­Secretary of State for Work and Pensions, despite the fact that the case was limited to social security determinations. 131 Fredman, ‘Substantive Equality Revisited’ (2016) (n 7) 713. 132 O’Cinneide, ‘Fumbling Towards Coherence’ (2006) (n 129).

7 Regulating Charitable Activities through the Requirement for Charitable Purposes: Square Peg Meets Round Hole ADAM PARACHIN

I. Introduction Charity law suffers from a square peg, round hole problem. While the common law offers insightful learning as to the charitableness of purposes, many debates over charity regulation are not directly concerned with the purposes of charities but rather with their activities. Therein lies a problem. A body of law concerned with the charitableness of purposes is not ideally suited to concretely addressing granular questions about activities. And yet questions about activities recur in charity law. Indeed, questions about activities arise at least as often as questions about purposes, if not more frequently. And they are among the most hotly contested matters that charity lawyers and charity regulators debate. They include questions about the precise extent to which charities may further their charitable ends through political means,1 the extent to which charities may raise revenues through business activities,2 the extent to which charities may charge user fees, eg, tuition at independent schools,3 the extent to which, if at all, 1 See, eg, J Chia, M Harding and A O’Connell, ‘Navigating the Politics of Charity: Reflections on Aid/Watch Inc v Federal Commissioner of Taxation’ (2011) 35 Melbourne University Law Review 353; M Harding, Charity Law and the Liberal State (Cambridge, Cambridge University Press, 2014) ch 6; A Parachin, ‘Charity, Politics and Neutrality’ (2015–2016) 18 Charity Law & Practice Review 23; and A Parachin, ‘Shifting Legal Terrain: Legal and Regulatory Restrictions on Political Advocacy by Charities’ in Nick Mulé and Gloria DeSantis (eds), The Shifting Terrain: Nonprofit Policy Advocacy in Canada (Montreal, McGill University Press, 2017) 33–62. 2 See, eg, Canada Revenue Agency, What is a Related Business? (CRA Document CPS-019, 31 March 2003) and Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd [2008] HCA 55. 3 See, eg, Independent Schools Council [2011] UKUT 421; P Luxton, Making Law? Parliament v The Charity Commission (London, Politeia, 2009); and M Synge, The ‘New’ Public Benefit Requirement. Make Sense of Charity Law? (Portland, Hart Publishing, 2015).

130  Adam Parachin charities may target their charitable programming on discriminatory bases4 and so on. In this chapter, I am not concerned with mooting substantive answers to any of these questions but instead with illustrating that the complexity these questions take on has a systemic source in the common law of charity. When it comes to debating the charitableness of purposes, the common law is rich with source materials. There is literally centuries’ worth of jurisprudence on the meaning of charitable purposes. But when it comes to debating the charitableness of activities, the common law offers far less to work with. In an insightful article, Maurice Cullity argued that charity law labours under a ‘myth of charitable activities’.5 Cullity was concerned with the legal attributes of a charitable activity. The difficulty with the phrase ‘charitable activity’, he noted, is that its plain language meaning has a great potential to mislead legal analyses. Taken at face value (and setting aside common law principles), the phrase ‘charitable activity’ connotes the idea of an intrinsically virtuous act. The implication is that the charitableness of an activity can be tested by discerning whether the activity has the inherent virtue and public benefit of something appropriately labelled ‘charitable’. Conversely, the implication is that an activity is non-charitable if it lacks the halo effect of the ‘truly charitable act’. But as Cullity pointed out, this is not how charity law characterises activities as charitable or non-­charitable. At common law, an activity is charitable if it is carried on in furtherance of a charitable purpose.6 This is why it can be difficult to regulate via the common law controversial means of furthering charitable ends. The common law is more concerned wither whether charitable purposes are being advanced than with how they are being advanced. In this chapter, I turn to the holding of the United States Supreme Court in Bob Jones University v United States (Bob Jones)7 to illustrate the imprecise tools available at common law to regulate the activities of charities. Although not a recent decision, the facts and circumstances of the case are ideal for my purposes. The charities before the court in Bob Jones invoked malevolent means of furthering charitable ends. Specifically, the charities advanced education but in racially discriminatory ways. Given the protracted and divisive history of racial discrimination in education in the US, the case pointedly raised an important question: does the common law of charity possess the resources to respond coherently when

4 See, eg, M Harding, ‘Charitable Trusts and Discrimination: Two Themes’ (2016) 2(1) Canadian Journal Of Comparative And Contemporary Law 227; M Harding, Charity Law and the Liberal State (2014) (n 1) ch 7; D Morris, ‘Charities and the Modern Equality Framework – Heading for a Collision?’ (2012) 65 Current Legal Problems 295; N Mirkay, ‘Is It Charitable to Discriminate: The Necessary Transformation of Section 501(c)(3) into the Gold Standard for Charities’ (2007) 2007(1) Wisconsin Law Review 45; and A Parachin, ‘Public Benefit, Discrimination and the Definition of Charity’ in K Barker and D Jensen (eds), Private Law: Key Encounters with Public Law (New York, Cambridge University Press, 2013) 171. 5 Maurice C Cullity, ‘The Myth of Charitable Activities’ (1990) 10(1) Estates and Trusts Journal 7. 6 Ibid, 10. 7 Bob Jones University v United States 461 US 574 (1983).

Regulating Charitable Activities  131 objections are raised not to the charitableness of the ends being pursued per se but instead to the means through which charitable ends are being pursued? Notably, a majority of the court in Bob Jones concluded that the racially discriminatory activities in question vitiated charitable status at common law (and thus also for US federal income tax purposes). However, the majority did so by relying upon a doctrine of absolute last resort – the doctrine of public policy. Invoking public policy implied that charity law otherwise lacked the doctrinal and normative resources to satisfactorily respond where a charitable purpose is being pursued in an objectionable way. As reasoned, the majority judgment in Bob Jones treated non-charitableness less as a substantive charity law conclusion than as an incidental by-product of public policy. But was it really necessary to resort to public policy in Bob Jones? If so, what does this reveal about the capacity of the common law of charity to regulate the activities of charities more generally? The analysis in this chapter matters for a number of reasons transcending the particular facts of Bob Jones. First, although the circumstances in Bob Jones are extreme, the case exposes a familiar problem in the law of charity. On what common law basis can a charities regulator restrict the activities of charities? The common law directly regulates the purposes of charities but only indirectly regulates their activities via the requirement for exclusively charitable purposes. Put simply, while charities must have charitable purposes, it is generally left to charities to determine the activities through which to further their purposes. The common law’s enabling posture vis-à-vis activities is a tremendous strength. Diverse and innovative charitable programming is possible when charities have the agency to decide for themselves how best to further their charitable purposes. But there is a downside too. The common law’s enabling approach to activities makes it very difficult for charity regulators to legally justify limits on the activities of charities. Second, and following on the above, the activities versus purposes distinction discussed in this chapter provides a helpful point of reference for evaluating the behaviour of charity regulators. If charity regulators are applying to activities common law principles meant for purposes – eg, vetting activities for public benefit – they are not faithfully applying common law principles. This raises the question of whether charity regulators often walk the line of evaluating the activities of charities as though they were purposes. Third, the analysis in this chapter reveals something about the ways in which statutory interventions might help improve on the common law of charity. The common law understanding of charity has over the years attracted sustained criticism, so much so that it seems to be taken as a received wisdom that codified definitions of charity are obviously the best path forward. But what exactly is it about the common law that could stand to be improved through statutory intervention? Is it the common law’s treatment of purposes or activities? The former seem to receive disproportionate attention. While the facts of Bob Jones are admittedly extreme, the case nonetheless illustrates a general truth: debates in charity law are not solely about charitable purposes but rather also include sustained

132  Adam Parachin debates over the activities through which charitable purposes may be furthered. Whether we are talking about racially discriminatory approaches to education, user fees, excessive political engagement or fundraising through business activities, we are at the end of the day talking about the same thing: activities as distinct from purposes. Perhaps there is an untapped role for surgical statutory interventions through which specific rules for specific activities may be adopted.

II.  Case Study: Bob Jones University v United States In this part of the chapter, I make the point that the majority’s reasoning in Bob Jones is illustrative of charity law’s square peg, round hole problem. The majority evidently (and understandably) had serious concerns over the racially discriminatory activities under review but struggled to explain those concerns using the common law’s traditional frames of reference. The majority’s resort to public policy was an implicit acknowledgement that it discovered in the common law of charity little else to work with. Viewed pragmatically, the case might be said to be a testament to charity law’s ability to respond appropriately when charities cross the line. However, it is not simply the outcome but also the reasoning that matters. If reasoning did not matter, courts would not issue reasons. The problem with public policy is that it is a poor basis for judicial decision-making, so much so that it is worth rigorously considering whether resorting to public policy was indeed necessary in Bob Jones. In Bob Jones, the US Supreme Court considered the charitableness of two private schools – Bob Jones University and Goldsboro Christian School. The schools pursued a charitable purpose – the advancement of education. But they pursued this purpose discriminatorily. Specifically, both schools followed racially discriminatory admissions policies.8 In 1970, after a court issued an injunction prohibiting the Internal Revenue Service (IRS) from awarding tax-exempt status to racially discriminatory schools,9 the IRS released a revenue ruling indicating that such schools could no longer qualify as charities under US tax law.10 Further to this revenue ruling, the IRS concluded that the discriminatory admission practices of the schools disqualified them from tax-exempt status under section 501(c)(3) and likewise disqualified contributions to the schools from the charitable contributions deduction under section 170 of the Internal Revenue Code. A majority of the Supreme Court agreed.

8 The admissions policy of the Goldsboro Christian Schools discriminated against African ­Americans, essentially restricting admissions to Caucasian students. Bob Jones University initially declined to admit any African American students. This policy was changed in the 1970s, when the university began to admit African Americans, but it nonetheless maintained a disciplinary rule that made interracial dating and marriage grounds for expulsion. 9 See Green v Kennedy, 309 F Supp 1127 (DDC). 10 Rev rul 71–447, 1971–2 CB 230.

Regulating Charitable Activities  133 Importantly, the majority judgment written by Chief Justice Burger expressly purported to be upholding the common law understanding of charity. Having first found that the tax benefits set out in sections 501(c)(3) and 170 were contingent upon conformity with the common law standard of charity,11 Chief Justice Burger went on to consider whether the racially discriminatory practices of the schools precluded them from meeting this standard. Reasoning that racial discrimination in education is contrary to public policy, he found that the discriminatory practices of the schools were likewise against public policy and that the schools were therefore non-charitable at common law.12 The consequence of this was that the schools were likewise disqualified from the tax benefits for charitable institutions under sections 501(c)(3) and 170.13 For a judgment that purported to be applying the common law of charity, the majority judgment of Chief Justice Burger in Bob Jones had remarkably little to say about the topic. There was no sustained analysis of charitable purposes, the relationship between charitable activities and charitable purposes, or public benefit. To the extent that any of these core pillars of charity law were mentioned, it was only in passing. The judgment instead focused almost entirely on public policy. As social policy, Bob Jones strikes a chord. But as a technical charity law precedent from a final court of appeal, it leaves something to be desired. Public policy has long since been widely criticised as a poor basis for judgment. It has been variously described as ‘a very unruly horse’, ‘a treacherous ground for legal decision’, ‘a very unstable and dangerous foundation on which to build’, a ‘slippery ground’, ‘a vague and unsatisfactory term’ and ‘calculated to lead to uncertainty and error when applied to the decision of legal rights’.14 It is a doctrine of last resort that ‘should only be invoked in clear cases in which the harm to the public is substantially incontestable and does not depend upon the idiosyncratic inferences of a few judicial minds’.15 The public policy analysis in Bob Jones lends credence to these concerns. Consider the sources relied upon by Chief Justice Burger as evidence of a public policy against racial discrimination in education. Ironically, Chief Justice Burger all but ignored the most directly relevant authority. In Runyon v McCrary,16 the US Supreme Court concluded that it was a violation of section 1981 of the Civil Rights Act of 1866 for private schools to engage in racially discriminatory admissions practices. Based on this authority, the admissions policies of the schools before the court in Bob Jones might have been contrary to federal law.17 This is important due 11 Bob Jones (n 7) 585–590. 12 Bob Jones (n 7) 591–596. 13 Ibid. 14 Church Property Trustees, Diocese of Newcastle v Ebbeck (1960) 104 CLR 394, 415 (HCA), Windeyer J (footnotes omitted). 15 Fender v St John-Mildmay (1938) AC 1, 12 (Lord Aitkin). 16 427 US 160 (1976). 17 This is most clear in relation to Goldsboro Christian School. From the description of the facts in Bob Jones, Goldsboro Christian School admitted Caucasian students and occasionally children

134  Adam Parachin to common law authorities establishing that illegality can result in charitable trusts either altogether failing or being modified via the doctrine of cy-près to remove the illegality.18 Leaving aside whether every instance of unlawful conduct by a ­charity should necessarily attract the doctrine of public policy, illegality is at least a ­plausible basis in law for judicial intervention where a charity is operating in direct violation of positive law. But Runyon v McCrary only received a few passing references in Chief Justice Burger’s public policy analysis. At no point in the majority judgment was it specifically contemplated that the school’s racially discriminatory practices were contrary to public policy because they were unlawful. Instead, Chief Justice Burger based the public policy analysis on sources of law not directly applicable to the context under review (discrimination by a private school). In so doing, he indulged a line of reasoning fraught with difficulty. The judgment implies that legal rules and principles formally inapplicable to charitable private schools can be indirectly applied to them under the guise of public policy. This contemplates that legal rules lack the boundaries to which they are expressly subject, that context-specific legal rules manifest ideals that can be extended under the guise of public policy to contexts in which they do not apply. For example, constitutional law principles were among the things on which Chief Justice Burger based the conclusion that charities are subject to a public policy against racial discrimination in education. His references to the Supreme Court’s earlier decisions in Brown v Board of Education19 and Norwood v Harrison20 carried with them the implication that the Fourteenth Amendment’s guarantee of equal protection was a determinant of public policy.21 Constitutional law places limits on state action and is thus relevant to determining whether the state is acting unconstitutionally if it confers charitable status (and the a­ssociated  ­benefits)

from racially mixed marriages provided one of the parents was Caucasian. The implication is that it categorically refused to admit African American children. The position is less clear in relation to Bob Jones University. Initially, Bob Jones University refused to admit any African American students. From 1971 to 1975, it admitted African American students provided they were married within their own race. Following the holding in Runyon v McCrary, the admission policy was revised to admit African American students. However, all students were subject to expulsion for interracial marriage, interracial dating or promoting either of these. The revised policy meant all students were subject to the same formal rules. However, it also meant that racial segregation was deliberately sustained within the school. No view is offered here as to whether this went far enough to comply with the holding in Runyon v McCrary. 18 A trust to provide porter to inmates of a workhouse was modified via the cy-près doctrine in ­Att-Gen v Vint (1850) 3 De G & Sm 704 because it ran contrary to statutory law. Likewise, a trust to provide seats for poor people to beg in by the highway was held invalid due to the criminality of begging. See Anon Duke 133 (as cited by H Picarda, The Law and Practice Relating to Charities 4th edn (West Sussex, Bloomsbury Professional, 2010) 451. Likewise, in Thrupp v Collett (1858) 26 Beav 125, a bequest to pay the fines of persons convicted under games laws failed because its tendency would be to induce further offences. See H Picarda, The Law and Practice Relating to Charities (2010) 450–1; M Harding, Charity Law and the Liberal State (Cambridge, Cambridge University Press, 2014) 31–33; and J Warburton, Tudor on Charities 9th edn (London, Sweet & Maxwell, 2003) 439. 19 347 US 483 (1954). 20 413 US 455 (1973). 21 Bob Jones (n 7) 592–596.

Regulating Charitable Activities  135 on discriminatory institutions.22 But that specific question was not squarely entertained in Bob Jones. The issue before the court in Bob Jones was not whether the state was constitutionally forbidden from extending the tax benefits under sections  501(c)(3) and 170 to schools with racially discriminatory admissions policies but rather whether such schools were charitable at common law and thus eligible for tax benefits exclusive to charities. By reasoning that constitutional values inform public policy, Chief Justice Burger countenanced charities being subjected to a form of indirect constitutional scrutiny via the doctrine of public policy. There are several problems with this. A resort to constitutional law principles as determinants of public policy is bound to be inconclusive. Equality is a constitutional value (evidenced by, for ­example, the guarantee of equal protection) but so too is the free exercise of­ religion. The former but not the latter factored into the majority’s public policy analysis even though it was acknowledged in the judgment that the racially discriminatory practices of the schools were based on sincerely held religious beliefs. Though Chief Justice Burger acknowledged that denying the tax benefits under sections 501(c)(3) and 170 to the schools engaged free exercise rights,23 he did not address how, if at all, free exercise rights (and other constitutional g­ uarantees) are themselves a feature of public policy. So we are left with the genuine problem of having to resolve why some constitutional protections but not others inform the public policy to which charities are subject. Also, defining public policy with reference to constitutional limits on state action essentially extends constitutional restrictions to charities. In so doing, it risks moulding charity into the image of the ideal constitutionally compliant state. But presumably not everything the state is constitutionally forbidden from doing is for that reason alone against public policy and thus impermissible for non-state charitable actors.24 It is one thing to ask whether it is unconstitutional for the state to extend tax benefits under sections 501(c)(3) and 170 to institutions with practices the state is constitutionally forbidden from directly funding or directly carrying out. It is quite another to import constitutional restrictions on state action into the common law of charity via the doctrine of public policy. Doing so begs the question in its assumption that restrictions on state action have a role to play in this context: if the state is not for constitutional law purposes implicated in the actions of charities – and no finding to that effect was made in Bob Jones – what decisive role is there for constitutional principles?

22 See, eg, E Zelinsky, ‘Are Tax “Benefits” Constitutionally Equivalent To Direct Expenditures?’ (1998) 112(2) Harvard Law Review 379, 400–409. 23 Bob Jones (n 7) 602–605. 24 See, eg, M Moran, ‘Rethinking Public Benefit: The Definition of Charity in the Era of the Charter’ in J Phillips, B Chapman and D Stevens (eds), Between State and Market: Essays on Charities Law and Policy in Canada (Montreal, McGill-Queen’s University Press, 2001) 258–259 and D Brennen, ‘Charities and the Constitution: Evaluating the Role of Constitutional Principles in Determining the Scope of Tax Law’s Public Policy Limitation for Charities’ (2002) 5(9) Florida Tax Review 779, 844–5.

136  Adam Parachin Also, once we are outside of the context of enforcing limits on state action in concrete disputes between citizen and state, it can be difficult to conceive of constitutional values except in the most abstract of terms. Without the disciplined structure that ordinarily guides constitutional rights interpretation in fact-specific disputes between citizen and state, constitutional values reduce to vague abstractions that can mean practically anything. How, for example, is a court, outside of a specific dispute between citizen and state, to give meaning to the constitutional value of equality and balance it against other equally abstract constitutional values? Resorting to the constitution as a repository of abstract values to inform the doctrine of public policy risks constitutional values being used as rhetorical devices through which courts (consciously or otherwise) lend disguised moral judgments the formal status of public policy. Chief Justice Burger also resorted in his construction of public policy to federal civil rights legislation and Executive Orders dealing with racial discrimination in various contexts other than private schooling.25 Again, it is not immediately clear what any of these establish of direct relevance to charity. The choice to prohibit racial segregation via legislation or executive order in specific contexts – eg, public school – entails the choice to not extend that rule to other contexts – charitable private schools. Transporting the values implicit in legal rules developed for and exclusive to specifically defined contexts to other contexts via the doctrine of public policy is deeply troubling in that it has the effect of universalising contextspecific rules. Another problem with the court’s public policy analysis in Bob Jones – and this point applies more generally to public policy as a basis for judgment in charity law decisions – is that it masks the true calculus behind the court’s decision. At the end of the day, the problem confronted by the Supreme Court in Bob Jones was a charity law problem. The schools in question advanced a charitable purpose – education – but did so in ways exacerbating longstanding racial divisions in the US. The essential question raised by this is whether the common law requirements for charitable status are met where a charity pursues a charitable end but is complicit in social harm by discriminatorily targeting its goods and services. Public policy enables an answer – ‘no’ – but conveniently avoids the need to squarely explain the precise discordance with charitable status. What specifically was the problem? Was there a total lack of public benefit? Was there a lack of net benefit?26 How should charity law balance benefit against harm? What criteria can charities use to target their goods and services at specific target populations

25 Bob Jones (n 7) 592–596. 26 M Harding suggests this as a plausible interpretation of Bob Jones, that via public policy the court was concluding there was a lack of net benefit. See M Harding, Charity Law and the Liberal State (2014) (n 1) 32.

Regulating Charitable Activities  137 without vitiating charitable status? What matters more to charitable status at common law – the ends being pursued or the means used to pursue the ends? While public policy relieved the court in Bob Jones from having to explain its answers to these questions, it did not relieve the court from having to consider them. These questions are unavoidable. Since these questions have to be confronted, it is better that they get confronted transparently than that they are masked behind the cover of public policy. A related problem with the public policy analysis in Bob Jones is that the doctrine of public policy is not exclusive to charitable trusts. For that reason alone it is a poor vehicle through which to establish a point of principle exclusive to charitable trusts. Both charitable and non-charitable dispositions are subject to the restraint of public policy. For example, settlors of personal trusts cannot condition beneficial interests in trusts on terms offensive to public policy, eg, requiring beneficiaries to divorce, abandon their minor children or perform illegal acts.27 A recent Canadian decision went as far as to conclude that public policy furnishes a basis for courts to reject a testator’s chosen beneficiary as unworthy.28 So if the true basis for judgment in Bob Jones is that racial discrimination is against public policy, this potentially bodes implications not only for the charitableness of racially discriminatory institutions but also more generally for the validity of racially discriminatory exercises of property rights. But the court in Bob Jones seems to have intended only to restrict the terms and conditions of charitable status and not property rights and trusts more generally. To be sure, it was specifically contemplated in the judgment that, although the racially discriminatory practices of the schools were incompatible with charitable status, the schools could continue to operate discriminatorily as non-charities, in other words that the racially discriminatory practices were not contrary to public policy for all purposes of law.29 We could make sense of this by concluding that charitable trusts are subject to a more rigorous form of public policy analysis than non-charitable manifestations of property rights. But it is problematic to conceptualise public policy as something that can vary from context to context. The nature of public policy is such that its content cannot vary from context to context. The very notion that public policy does not ‘depend on the idiosyncratic inferences of a few judicial minds,’30

27 See, eg, A Oosterhoff, D Freedman, M McInnes and A Parachin, Oosterhoff on Wills, 8th edn (Toronto, Thomson Reuters, 2016) 713–739. 28 McCorkill v McCorkill Estate 2014 NBQB 148, affirmed 2015 NBCA 50. The case dealt with an unconditional bequest from a Canadian testator to the National Alliance, a white supremacist Virginia corporation. The bequest was struck on the ground that it would likely be used for racist purposes. 29 Bob Jones (n 7) 603–604 (Chief Justice Burger): ‘Denial of tax benefits will inevitably have a substantial impact on the operation of private religious schools, but will not prevent those schools from observing their religious tenets’. 30 Re Millar [1938] SCR 1, [1938] 1 DLR 65 (Crocket J, quoting Lord Aitkin in Fender v Mildmay [1937] 3 All ER 402 at 13 SCR).

138  Adam Parachin but is instead based on values commonly agreed upon in society, seems to frustrate the possibility of public policy varying from one context to another. Perhaps we could avoid this problem by agreeing that there is only one public policy applied in trust law but that charitable trusts are held to a higher standard of conformity compared to non-charitable trusts. But, again, it’s not helpful to contemplate degrees of conformity with public policy. There is one public policy and a trust – charitable or otherwise – either violates it or it does not. The elephant in the room in Bob Jones was religion. The schools before the court in Bob Jones argued that, since their educational practices relating to race were grounded in sincerely held religious beliefs, removing charitable status from the schools on the basis of those beliefs amounted to an unconstitutional interference with their free exercise of religion. The majority rejected this argument, reasoning that restrictions on religiously based conduct are constitutional where (as here) they serve compelling governmental interests.31 Treating religion as solely a constitutional law free exercise issue left unaddressed an important question: what, if anything, does the charitableness of religion at common law establish about the charitableness of providing education consistently with sincerely held religiously beliefs? The irony of the decision is that the very religious beliefs that vitiated charitable status in Bob Jones in the context of education could presumably be advanced with the benefit of charitable status in the context of religion, eg, a church teaching the identical beliefs. This leaves charity law celebrating religious beliefs in one context while decrying those very same beliefs in another on the basis that they contradict fundamental public policy. Implicit in this reasoning is a conception of charity in which the Pemsel categories of charitable purposes are assumed to be discrete silos standing in isolation of one another such that that which is charitable in one silo (religion) can simultaneously be against public policy in another (education). The common law of charity risks internal contradiction if a given religious belief is treated as charitable in one context – the advancement of religion, but against fundamental public policy in another – the advancement of education. None of these critiques are intended to repudiate the conclusion reached by the majority in Bob Jones but rather to illustrate the judgment’s forced reasoning. For a charity law judgment, the decision had remarkably little engagement with the traditional touchstones of charity law. Public policy enabled the majority to conclude against the charitableness of the schools under review without having to explain that conclusion with specific reference to the unique juridical features of charitable trusts or the doctrinal tests for charitable status. This is why the public policy analysis in Bob Jones is wanting: it obfuscated rather than illuminated the incompatibility of the impugned activity (racial discrimination in education) with the common law meaning of charity.



31 Bob

Jones (n 7) 602–605.

Regulating Charitable Activities  139

III.  Doing ‘Charity’ – Purposes versus Activities Was it not possible for the majority in Bob Jones to conclude that the schools were acting non-charitably – that racial discrimination is a non-charitable activity – without having to rely upon the artifice of public policy? To address this question, we need to consider charity law’s methodology for characterising activities as charitable versus non-charitable. That analysis will shed light on Bob Jones specifically but also more generally on instances in which the activities of charities raise concerns. As we shall see, these traditional frames of reference might have done more to frustrate than facilitate the majority’s conclusion. The objection in Bob Jones was at the end of the day about activities rather than purposes. Given its emphasis on purposes, the common law of charity is not well-suited to addressing granular questions about activities.

A.  General Principles As a purpose-focused body of law, the common law regulates the purposes of charities though not their activities, at least not directly. Purposes are the ends being pursued. Purposes address ‘the why question’, as in: why (to what end) does the institution carry on activities? Activities are the means through which an institution furthers its purposes. Activities address ‘the how question’, as in: how (through what means) does the institution further its purposes? Whereas purposes are abstract (depicting institutions at a macro level), activities are specific (depicting institutions at a granular level). At common law, charitable institutions must be established and operated for exclusively charitable purposes.32 This means the purposes of a charity must fall within (and only within) the Pemsel categories (the ‘four heads’) of ­charitable purposes: (1) the relief of poverty, (2) the advancement of education, (3) the advancement of religion and (4) other purposes of public benefit.33 Notably, there is no analogous requirement for the activities of charities. Specifically, while there is a common law requirement for exclusively charitable purposes, there is no parallel requirement at common law for exclusively charitable activities, at least not an activities requirement separate and distinct from the requirement for exclusively charitable purposes.

32 See, eg, Vancouver Society of Immigrant and Visible Minority Women [1999] 1 SCR 10 (Vancouver Society) paras 38–40 and 154–155. 33 In recent years, the legislatures in some jurisdictions (not Canada) have codified the meaning of charity through statutory lists of charitable purposes. The statutory lists include but also expand on the Pemsel categories of charitable purposes. See, eg, Charities Act 2013 (Australia), Charities Act 2011 (England and Wales), Charities Act 2009 (Ireland), Charities Act (Northern Ireland) 2008 (Northern Ireland), and Charities and Trustee Investment (Scotland) Act 2005 (Scotland).

140  Adam Parachin The common law does not simply ignore the activities of charities. But the common law, to the extent that it regulates the activities of charities, does so indirectly (and arguably somewhat imprecisely) via the requirement for exclusively charitable purposes. To be sure, the requirement for exclusively charitable purposes carries with it by necessary implication a restriction on activities. Since charities must have exclusively charitable purposes, the activities of charities should further charitable rather than non-charitable purposes. In other words, it is through the enforcement of the requirement for exclusively charitable purposes that the common law of charity indirectly regulates the activities of charities. The primacy of purposes over activities is evident in the common law’s methodology for characterising the activities of charities as charitable or non-charitable.34 To say that a particular activity is a charitable (or non-charitable) activity is not necessarily to form a judgment about the intrinsic character of that activity – that it is intrinsically charitable (or non-charitable) – but rather to make an observation about its relationship to charitable (or non-charitable) purposes; that it contributes to the attainment of charitable (or non-charitable) purposes. That is, the common law uses an instrumental methodology for characterising activities. This means activities are classified not with reference to their intrinsic character but rather with reference to the purposes they further. So the feature qualifying an activity as a charitable activity at common law is not that on its merits it is an inherently good or praiseworthy activity per se but rather that it is carried out to achieve a good or praiseworthy purpose – a charitable purpose. Likewise, the feature qualifying an activity as a non-charitable activity is not that it is a blameworthy activity per se but rather that it is carried on to achieve a non-charitable purpose.35 The principle is illustrated by one of the leading decisions dealing with the activities/purposes distinction – Incorporated Council of Law Reporting v Attorney General.36 In this judgment, Lord Russell makes the point (citing the activity of publishing the Bible) that the very same activity can be charitable in one context but non-charitable in another depending upon the purpose for which it is carried on to achieve.37 Lord Russell’s example is meaningful because it exposes the derivative status of activities in the common law of charity. While charitable purposes are affirmed by the law of charity in their own right, the charitableness of activities derives from and is entirely contingent upon whether they are carried on in furtherance of charitable purposes. So, while the common law of charity makes unambiguous moral judgments about the universal worth of charitable purposes, its claims about charitable 34 See, eg, Vancouver Society (n 33) paras 53, 54, 56, 58, 152 and 154. See also MC Cullity, ‘The Myth of Charitable Activities’ (1990) (n 5). 35 In Toronto Volgograd Committee v Minister of National Revenue [1988] 1 CTC 365, Stone J reasoned (see para 8) that the measures in federal income tax law in Canada dealing with charities would be ‘difficult if not impossible to administer’ if the expenditures of charities (and by implication the activities of charities more generally) had to be characterized as charitable and non-charitable without regard for the purposes for which they were incurred (or carried out). 36 [1971] 3 All ER 1029. 37 Ibid, 1034.

Regulating Charitable Activities  141 a­ctivities are comparatively modest. Whereas the statement ‘purpose X is a ­charitable purpose’ says something about the worth of purpose X, the statement ‘activity Y is a charitable activity’ merely denotes a cause and effect – that activity Y will cause (or contribute to) the attainment of a charitable purpose. There is more that could be said about the activities/purposes distinction, but this will suffice to enable some observations germane to this chapter.

B.  Malicious Purposes Rarely will a charity be established for an overtly non-charitable invidious purpose. Where this does occur, the correct answer at law is clear: since charities must be established for exclusively charitable purposes, an institution with an objectionable purpose (be it a discriminatory purpose or something else) is plainly non-charitable. In fact, this is the best explanation for the outcome in Canada Trust Co v Ontario Human Rights Commission (Canada Trust Co).38 At issue in this case was a discriminatory scholarship trust. The terms of the fund provided that a student could qualify for a scholarship only if he or she was a ‘British subject of the White Race and of the Christian Religion in its Protestant form’ and only if ‘without financial assistance’ he or she ‘would be unable to pursue a course of study’.39 No more than one quarter of the scholarship moneys awarded in any given year could be given to women.40 The racial and religious restrictions also limited who could participate in the management and administration of the fund.41 Similar to Bob Jones, the Ontario Court of Appeal concluded that the trust contravened public policy. However, the most straightforward explanation for the case is that the trust had an express discriminatory purpose and therefore failed the common law requirement for exclusively charitable purposes. The recitals to the trust made clear that scholarships were not the means for the charitable end of advancing education but rather the means for the non-charitable end of perpetuating racial and religious hierarchy.42 The trust’s express contemplation of a non-charitable purpose is what made Canada Trust Co an easier decision than Bob Jones. 38 (1990) 69 DLR (4th) 321 (Ont CA). For very helpful analyses, see B Ziff, Unforeseen Legacies: Reuben Wells Leonard and the Leonard Foundation Trust (Toronto, University of Toronto Press, 2000); J Phillips, ‘Anti-Discrimination, Freedom of Property Disposition, and the Public Policy of Charitable Educational Trusts: A Comment on Re Canada Trust Company and Ontario Human Rights C ­ ommission’ (1990) 9(3) Philanthropist 3; and JC Shepherd, ‘When the Common Law Fails’ (1988-1989) 9 Estates & Trusts Journal 117. 39 Ibid, para 16. 40 Ibid, para 16. 41 Ibid, para 14. 42 The recitals in the trust deed shed light on the trust’s purposes. They stated that ‘the White Race is, as a whole, best qualified by nature to be entrusted with the development of civilization and the general progress of the World’, that the ‘progress of the World depends in the future, as in the past, on the maintenance of the Christian religion’ and that ‘the advancement of civilization depends very greatly upon the independence, the stability and prosperity of the British Empire’: ibid, para 12.

142  Adam Parachin

C.  Are Activities Revealing of Purposes? Activities and purposes do not exist in isolation of each other. As we have seen, the character of an activity (charitable or non-charitable) is determined by the character of the purpose for which it is carried on. Before giving further consideration to this principle, we need to ask whether the reasoning also works in the reverse – whether the character of an institution’s purposes (charitable or non-charitable) is determined by its activities. Consider the discriminatory activities of the universities under review in Bob Jones. What, if anything, do those activities reveal about the ultimate purposes that were being pursued? On one view, the discriminatory admissions practices do not ultimately change the fact that the purpose engaged was the advancement of education. From this perspective, a discriminatory activity in furtherance of education does not a discriminatory purpose make.43 Another view might be that the discriminatory admissions practices revealed a more nuanced purpose, ie, to advance and sustain racially segregated education. From this perspective, the educational purposes are not so easily sanitised of the discriminatory admissions practices. However, the orthodox position of charity law is that activities are generally irrelevant to determining whether the purposes of an institution are charitable at law, at least where those purposes are clearly recorded in a written ­constitution.44 Using the example of education, Vaisey J in Re Shaw’s Will Trusts observed that ‘once it is found that there is a trust of an educational character [education being an unquestionably charitable purpose] … the matter speaks for itself ’.45 The formal irrelevance of activities to the ascertainment of purposes was recently affirmed in Independent Schools Council.46 To be clear, the principle is not that literally anything goes when it comes to activities. An institution’s activities can reveal that it is acting contrary to (or outside of) its formal charitable objects. It is just that the activities are not themselves determinative of an institution’s formal purposes. In rare circumstances, courts will consider activities at the stage of identifying and characterising an institution’s purposes. Where, for example, there is no written constitution, the purposes of the institution have to be inferred from its activities.47 Alternatively, there might be a written constitution with clearly identified purposes but the purposes are novel, raising questions as to whether they are

43 See M Harding (2014) (n 1) 206–208. 44 See J Garton, Public Benefit in Charity Law (Oxford, Oxford University Press, 2013) 81, citing Hunter v Attorney General [1899] AC 309 (HL); Bowman v Secular Society [1917] AC 4016 (HL); Incorporated Council of Law Reporting for England and Wales v Attorney-General [1972] Ch 73 (CA); and Independent Schools Council [2011] UKUT 421. 45 [1952] Ch 163 (Ch) 169. Quoted in J Garton, ibid, 3.42. 46 [2011] UKUT 421 (TCC) 188. 47 See J Garton, Public Benefit in Charity Law (2013) (n 45) 3.39.

Regulating Charitable Activities  143 charitable at law. Here activities might be considered to enrich understanding of the novel purposes.48 But these are the exceptions rather than the rule. Even if charity law had a consistent tradition of considering activities when characterising purposes, we would still have the problem that activities, at least when they are isolated or discrete, will not significantly flavour purposes. In the same way that a journeyman’s day-to-day steps are revealing of his or her ultimate destination, the activities of a putative charity are revealing of its purposes. But individual steps do not establish very much about the destination. Even isolated missteps do not somehow alter the destination. We presumably need a sustained number of steps, a critical mass of steps, before being able to draw conclusions about the destination, eg, that there is an altered destination or new material waypoints. The same point applies to objectionable activities of a charity. If the activities are discrete and limited, it will very often be difficult to sustain the argument that they taint the institution’s purposes. If they are sustained, or a fundamental feature of the institution’s programming, they can start to shed light on the end purposes being pursued.49

D.  Charitable Purposes as Abstractions How, in any event, could activities alter our conception of an institution’s purposes? Activities are specific. Purposes are abstractions from the specific. The process of abstracting from the specific (the activities) to the general (the purposes) necessarily results in some of the particulars being left out of our description of the general. It is therefore possible that a specific problematic activity – take the racially discriminatory practices in Bob Jones – would not oblige the conclusion that there is a non-charitable gloss to the institution’s purposes; that the purpose in Bob Jones was not to advance education per se but rather to advance racially segregated education. The common law of charity does not have a tradition of insisting upon highly particularised formulations of purposes at the stage of vetting institutions for charitableness. If anything, the tendency is the exact opposite, to assess charitableness by abstracting the specific purposes of specific institutions to the level of generality reflected in the Pemsel categories. It is understood (whether or not expressly stated in the authorities) that, whereas the Pemsel categories of charitable purposes are generic, individual charities are established for highly specific instantiations of those generic purposes.50 48 Ibid, 3.40. 49 In Re Public Trustee and Toronto Humane Society [1987] OJ No 534, Anderson J reasoned that limited political activities do not disclose political purposes but that the opposite might hold true for sustained and significant political activities. 50 As J Garton notes, purposes are sometimes described in written constitutions so specifically that it becomes difficult to disentangle purposes from activities, eg, to advance education by _______. See J Garton (2013) (n 45) 3.38.

144  Adam Parachin This exposes a shortcoming with the oft-cited proposition that charities need to be established for one or more of the Pemsel categories of charitable purposes. This proposition is potentially misleading in the sense that it implies charities must be established for purposes synonymous with the Pemsel categories. It is more literally the case that charities have to be established for one or more purposes falling within the Pemsel categories. In other words, the specific purposes of a specific institution – to advance the Christian religion in the Baptist tradition – need merely be capable of being abstracted to the level of generality reflected in the Pemsel categories, ie to advance religion. Recognising that the purposes of putative charities will frequently (if not inevitably) entail specific representations of the generic Pemsel categories, the common law has evidently adopted a strategy for reconciling the specificity of the purposes for which individual charitable institutions are established with the generality of the Pemsel categories. That strategy is against assessing charitableness based on the most particularised formulation possible of an institution’s purposes but is in favour instead of considering whether the particular purposes under review – say, ‘to advance the Christian religion in its Baptist form’ – can be abstracted to the generality of the Pemsel categories, ie ‘to advance religion’. Embedded in this strategy is the principle that it matters more what is ultimately trying to be achieved than how it is trying to be achieved. In other words: ‘It is the ends, or purposes, not the means by which they are to be achieved, which determine whether a trust or corporation is charitable at law’.51 The natural tendency of this strategy is against allowing discrete activities to flavour how an institution’s purposes are framed at the stage of assessing the charitableness of those purposes. Even formally targeted charitable programming has attracted this strategy. For example, academic scholarships exclusive to adherents of particular religions have been upheld as charitable as being for the advancement of education.52 There was no suggestion in these cases that the proper construction of the purposes of these trusts was to advance education for Catholics only (or for Protestants only) or to deny benefaction to non-Catholics (or to non-Protestants). So in a case like Bob Jones the tendency will be to frame the purposes as being the advancement of education as opposed to something more particularised, eg, the advancement education through racial segregation.

E.  Characterising Activities as Charitable versus Non-Charitable We have seen that a given activity will usually not factor into the ­characterisation of an institution’s purposes. And so the discriminatory activities before the 51 M Cullity (1990) (n 5) 10. 52 See Re Ramsden Estate [1996] PEIJ No 96 and University of Victoria v British Columbia (AG) [2000] BCJ No 520.

Regulating Charitable Activities  145 court in Bob Jones did not oblige the conclusion that the schools in question had non-charitable discriminatory purposes. It remains to be considered in further detail how the common law characterises activities as charitable versus non-­ charitable. Doing so will help us determine whether the discriminatory activities under review in Bob Jones could have been regulated by the common law of ­charity on the basis that they were non-charitable activities. The analysis here bodes obvious implications for other instances in which there are concerns over charities acting non-charitably. To address this topic, we need to revisit the feature qualifying an activity as a charitable activity. The first step is to acknowledge (again) the centrality of purposes to the common law of charity. As we have seen, charity law does not characterise activities as charitable or non-charitable in the abstract. That approach to characterising activities has been described as ‘highly misleading’53 and ‘a conceptual impossibility’.54 Instead, the character of activities is determined with reference to the purposes they are carried on to achieve.55 This is why courts have recognised that the same activity can be charitable in one context – where it is carried on to achieve a charitable purpose, and non-charitable in another – where it is carried on to achieve a non-charitable purpose.56 One commentator sums it up as follows: ‘As the concept of charity is concerned with purposes, or ends and not means, any attempt to characterise the means as charitable or non-charitable without reference to the ends or objects to be achieved is necessarily doomed to failure’.57 Perhaps surprisingly, courts have not described in great detail the nature of the link that must exist between an activity and a charitable purpose in order for that activity to qualify as a charitable activity. In one of the leading cases, Vancouver Society of Immigrant and Visible Minority Women v M.N.R., Justice Gonthier seemed to dismiss the need for specific judicial guidance, observing as follows: ‘There is no magic to this process: it is simply a matter of logical reasoning combined with an appreciation of context’.58 In the same decision, Justice Gonthier loosely described the nature of the requisite link, saying that charitable activities must have a ‘coherent relationship’ to charitable purposes,59 have ‘the effect of furthering the purpose’,60 be ‘sufficiently 53 M Cullity, (1990) (n 5) 7. 54 Ibid. 55 See paras 52, 53, 54, 56, 58, 59, 101, 152, 153, 154 and 205 of Vancouver Society (n 32). 56 Incorporated Council of Law Reporting for England and Wales v Attorney General [1972] Ch 73 (CA) 86 (Russell LJ): Suppose on the one hand a company which publishes the Bible for the profit of its directors and shareholders: plainly the company would not be established for charitable purposes. But suppose an association or company which is non-profit making, whose members or directors are forbidden to benefit from its activities, and whose object is to publish the Bible; equally plainly it would seem to me that the main object of the association or company would be charitable – the advance or promotion of religion.

57 M

Cullity, (1990) (n 5) 12. Society (n 32) para 98. 59 Ibid, para 52. 60 Ibid, para 53. 58 Vancouver

146  Adam Parachin related to those purposes’,61 enjoy a ‘sufficient degree of connection’ to charitable purposes,62 be ‘sufficiently related’ to charitable purposes,63 be ‘substantially connected to and in furtherance of ’ charitable purposes, and be ‘instrumental in achieving the organization’s goals’.64 Observing that there must be a ‘direct, rather than an indirect, relationship between the activity and the purpose it serves’, he indicated that he was ‘reluctant to interpret “direct” as “immediate”’, specifying that ‘[a]ll that is required is that there be a coherent relationship between the activity and the purpose, such that the activity can be said to be furthering the purpose’.65 In the same case, Justice Iacobucci agreed that charitable activities must ‘directly further’ charitable purposes but likewise did not elaborate on what specifically this entails.66 All of this exposes the remarkably enabling posture of the common law of charity. The common law requirements for charitable status tend to be rather general in nature, leaving it to charities to determine for themselves most (practically all?) of the particulars. As we saw above, even charity law’s strictest requirement – the requirement for exclusively charitable purposes – affords charities considerable autonomy to personalise and particularise their unique charitable missions. The common law is even more enabling with activities. Activities are regulated by the common law indirectly (and rather loosely) through the requirement for exclusively charitable purposes. The system by design gives charities tremendous latitude to determine how to further their charitable missions. If an activity furthers a charitable purpose, it is by definition a charitable activity. It need not be the best way to further a charitable purpose. It need merely be a way to further a charitable purpose. As Justice Gonthier observed in Vancouver Society, there is ‘no magic’ to the test.67 The purpose-focused methodology of the common law shines a spotlight on what charity law does and does not condone through grants of charitable status. Charity law is all about purposes. A grant of charitable status is an affirmation and celebration of the worthiness of an institution’s purposes. While charity law also makes normative claims about the worthiness of charitable activities, those claims are comparatively modest. Charitable activities are not said to be worthy in and of themselves. To the contrary, the worthiness of charitable activities is derivative in the sense that it is contingent upon (derives from) the capacity of activities to further worthy [read charitable] purposes. So, yes, charity law condones both charitable purposes and charitable activities, but its condonation of charitable activities is all but restricted to one characteristic of charitable activities – their capacity to further charitable purposes.

61 Ibid,

para 53. para 54. 63 Ibid, paras 56 and 63. 64 Ibid, para 54. 65 Vancouver Society (n 32) para 62. 66 Ibid, para 154. 67 Ibid, para 98. 62 Ibid,

Regulating Charitable Activities  147 Standing back, we now have a context for understanding what it means to say that activity X is non-charitable. Construed from the vantage of the common law, that statement signals that activity X does not further charitable purposes. Conversely, the statement that X is a charitable activity signals that the activity furthers a charitable purpose. Applying this to the facts and circumstances of Bob Jones, the question is whether the racially discriminatory practices of the schools furthered education. It would have been difficult to sustain the argument in Bob Jones that education was not being advanced. The problem was not the failure to advance education but rather that education was being advanced in a way that perpetuated the longstanding blight of racism in education. But if we take seriously the idea that activities are charitable if they are carried on in furtherance of a charitable purpose, it becomes difficult to deny that an activity carried on in furtherance of education is by definition a charitable activity. Therein lies a fault line in the common law of charity that Bob Jones so perfectly illustrates. The common law’s method of categorising an activity as charitable versus non-charitable – on the basis of the purpose being pursued – results in blunt binary categories. Activities are either in furtherance of charitable purposes (and thus charitable) or in furtherance of non-charitable purposes (and thus noncharitable). In the ordinary course, this simple taxonomy is workable and indeed even advantageous. By leaving it to charities to determine for themselves how best to further their charitable purposes, the common law fosters enormous flexibility in the range of activities through which charities may pursue their purposes. This approach is well-suited to encouraging a dynamic and pluralistic charitable sector. However, some notable shortcomings inhere in the common law’s blunt approach to activities. The common law is reductionist in its assumption that activities are either carried on to further charitable ends or they are not. Among the things this leaves off the table is the possibility that a given activity might simultaneously further a charitable end (education) but also a non-charitable end (perpetuating racial segregation). The common law’s ‘all-or-nothing’ approach is not well-suited to dealing with this kind of ‘dual character activity’. Likewise, it leaves little latitude for dealing with circumstances where activity furthers a charitable end but in a harmful way. This helps to explain the majority’s resort to public policy in Bob Jones. Whatever else might be said of public policy, it at least afforded the majority a path forward while relieving against having to directly engage with the orthodoxy that an activity carried on for a charitable purpose is by definition a charitable activity.

IV.  Public Benefit and Activities So far the analysis has had very little to say about the charity law requirement for public benefit. This might seem to be a strange omission. Public benefit is a prerequisite for charitable status. It is trite law that a grant of charitable status is impossible in the absence of public benefit. One might have thought that public

148  Adam Parachin benefit would be fundamental to disqualifying objectionable activities (such as the racially discriminatory practices under review in Bob Jones) as charitable activities. The role the public benefit requirement might play in the regulation of discriminatory charity is a complex topic. The argument has been made that public benefit cannot (or at least should not) co-exist with discrimination.68 The argument has also been made that the incompatibility of public benefit with discrimination very likely depends on what is meant by discrimination and the context in which the alleged discrimination plays out.69 The gist of the latter argument is that neither of the two components of public benefit – the public component or the benefit component70 – are necessarily contradicted by every potential manifestation of discrimination. The benefit component of public benefit entails a value judgment through which courts consider whether the trust under review makes the world a better place in a way the law regards as charitable. While discrimination sounds like an unlikely candidate for this standard, the benefit component of public benefit is not a requirement for absolutely benefit but rather a requirement for net benefit (the good must outweigh the harm).71 It is not obvious as a matter of law that literally every incidence of discrimination will necessarily mean there is no net benefit.72 The public component of public benefit is concerned with who benefits.73 In practice, it tends to function as an ‘anti-private’ standard. Subject to an exception

68 See, eg, M Harding, ‘Charitable Trusts and Discrimination: Two Themes’ (2016) (n 4); M Harding (2014) (n 1) ch 7; D Morris, ‘Charities and the Modern Equality Framework – Heading for a Collision?’ (2012) 65 Current Legal Problems 295; and N Mirkay, ‘Is It Charitable to Discriminate’ (2007) (n 4) 45. 69 See, eg, A Parachin, ‘Public Benefit, Discrimination and the Definition of Charity’ (2013) (n 4) 171. 70 J Garton takes issue with whether the questions are so easily separable. See J Garton (2013) (n 45) 33. It is nonetheless orthodox to dissect public benefit into these two components. See, eg, H Picarda, The Law and Practice Relating to Charities (2010) (n 19) 29 and J Warburton and D Morris, Tudor on Charities, 8th edn (London, Sweet & Maxwell, 1995) 5. 71 In National Anti-Vivisection Society v IRC [1947] 2 All ER 217, Lord Wright observed at 223 that courts should ‘weigh against each other’ detriment and benefit and that the impact of a trust ‘must be judged as a whole’. In the context of the decision, this meant weighing the material benefits of vivisection against the moral benefits of anti-vivisection. The implication is that benefits can offset detriments (and vice versa) even if they are not of the same nature. 72 In Canada, 149.1(6.21) of the Income Tax Act RSC 1985, (5th Supp), c. 1, as amended, provides: (6.21) Marriage for civil purposes – For greater certainty, subject to subsections (6.1) and (6.2), a registered charity with stated purposes that include the advancement of religion shall not have its registration revoked or be subject to any other penalty under Part V solely because it or any of its members, officials, supporters or adherents exercises, in relation to marriage between persons of the same sex, the freedom of conscience and religion guaranteed under the Canadian Charter of Rights and Freedoms. The import of the subsection is that a church only solemnising heterosexual marriages does not thereby jeopardise its charitable registration. We might think very differently about, say, a relief of poverty charity drawing distinctions on the basis of sexual orientation. 73 If it is unclear who benefits from a putative charitable trust, then charitable status will be withheld. For example, the trusts in Keren Kayemeth Le Jisroel Ltd v IRC [1932] AC 650 HL and Williams’ Trustees v IRC [1947] AC 447 failed to qualify as charitable because, inter alia, it was not clear what community, if any, the trusts would benefit.

Regulating Charitable Activities  149 for trusts established for the relief of poverty, the public component of public benefit prohibits private qualifications from being used to determine who is eligible for goods and services from a charitable trust. Persons cannot qualify for membership in the class of potential beneficiaries on the basis that they are known to the settlor and thus specifically named as a potential beneficiary in the trust instrument.74 Neither can a charitable trust specify that the basis on which persons are included in the trust’s class of potential beneficiaries is that they stand in a particular private relationship (eg, familial, employment, associational or friendship). This is sometimes described as the ‘personal nexus test’75 or even a ‘stranger’ requirement.76 The public component of public benefit is not specifically calibrated to police discriminatory exclusions from charitable programming. Its immediate concern is prohibiting persons from being included in charitable programming on improper bases (ie, bestowed charitable benefaction on the basis of some personal nexus) rather than excluded on improper bases. But rather than delve into the nuances of these arguments, the point I want to emphasise here is that the focus in this chapter is on means (activities) not ends (purposes). We are considering the tools charity law offers to intervene in the face of objections over the activities through which charities pursue their purposes as distinct from objections over the purposes themselves. The distinction matters because it is the purposes, not the activities, of charities that are tested for public benefit.77 Since it is purposes that are tested for benefit, activities do not need to be independently shown to bring benefit. The benefit of activities is derivative in the sense that it derives from their furtherance of beneficial charitable purposes. Stated otherwise, charity law infers the benefit of activities from their furtherance of charitable purposes. This approach carries with it the risk that charities might pursue their charitable purposes through activities we might rather they not undertake (or only ­undertake

74 See paras 8 and 53 of Lord MacKay, Halsbury’s Laws of England, 4th edn, 2001 Reissue (London, Butterworths, 2001). For example, in Re Compton [1945] 1 Ch 123, Lord Greene MR observed at 137 that a trust to educate named nephews and nieces of the testator was not charitable. Even trusts for the relief of poverty (which we will see receive relaxed treatment under the public component of the public benefit test) cannot specifically name the end beneficiaries. See Re Scarisbrick [1951] Ch 622 (CA) 651 (Jenkins LJ). But see Re Segelman [1996] Ch 171 for a more accommodating stance (and P Luxton, The Law of Charities (Oxford, Oxford University Press, 2001) 175 for criticisms of Re Segelman). 75 See, eg, P Luxton, ibid, ch 5. 76 Ontario Law Reform Commission Report on the Law of Charities (Toronto, Ontario Law Reform Commission, 1997) 150. 77 See Independent Schools Council (n 3) para 188, where it was concluded that ‘public benefit as it was understood prior to the 2006 Act [at common law] was also directed to what the relevant trust or institution was set up to do, not on how it operated’. See also P Luxton, Making Law? (2009) (n 3) 19. Likewise, J Garton (2013) (n 45) observes: ‘[t]he orthodox position is that it is the purposes of an organization, and not the activities undertaken in pursuit thereof, that are relevant to its charitable status’. M Synge similarly observes that: ‘[t]he principle that the charitable status of a trust or organisation depends on its purposes (rather than its activities …) is so clearly established, and judicial authority so abundant, that it hardly needs to be cited.’ See M Synge, The ‘New’ Public Benefit Requirement (2015) (n 3) 36 (emphasis in original).

150  Adam Parachin within limits). When that happens, it is no answer to say that the objected-to activities lack public benefit. The principle cannot be that only purposes are vetted for public benefit except when it is divined that activities too should be vetted for public benefit. Relating this back to the discriminatory activities before the court in Bob Jones, the common law did not facilitate the conclusion that the activities in question were non-charitable on the basis that they lacked public benefit. Activities are not specifically tested for public benefit. Under the circumstances, the appeal of public policy to the majority in Bob Jones is apparent. Public policy provided the court with a path forward that the traditional doctrines of charity law frustrated. But also apparent here is a gloss on the function served by the doctrine of public policy. Could it be that the doctrine of public policy is a disguised way for courts and charities regulators to selectively subject activities to a veiled form of public benefit analysis?78 This is in essence what appears to have happened in Bob Jones. Public policy in Bob Jones was arguably an artifice that allowed the court to indulge a line of reasoning – that a given activity lacked public benefit – not normally available in charity law.79 On the one hand, we could consider this to be an imperfect, albeit workable, approach. The safety valve of public policy leaves us with the benefit of charity law’s enabling posture vis-à-vis ‘activities’ while providing a mechanism to selectively intervene in those rare instances in which charity law’s approach to activities is too enabling. Public policy means that an overtly racist approach to education can be deemed non-charitable notwithstanding that it furthers education. On the other hand, public policy is an unsatisfactory basis for decision. As applied in such cases as Bob Jones, public policy seems to entail (among other problems) charities being subjected to sources of law – eg, constitutional law – formally inapplicable to them. Public policy is also an excessively blunt instrument. As applied to activities, public policy can presumably only result in an activity being outright prohibited. But there may well be circumstances where the concern raised by an activity is not that it should be prohibited but rather that it should be restricted (permitted within limits). Public policy cannot help here. It would strain credulity to reason that an otherwise permissible activity only becomes against public policy at the point that it starts consuming too much of a charity’s time and attention.

78 Note, for example, H Picarda’s reference to activities in his formulation of the doctrine of public policy (H Picarda, The Law and Practice Relating to Charities (2010) (n 19) 450): A gift for an object which is charitable but illegal, or for an object which is charitable by means which are illegal or against public policy, is impossible … If from the context of a gift the general charitable intention of the donor is plain, but the prescribed manner of carrying out that intention is illegal, or against public policy, the court will execute the gift cy-près. 79 Matthew Harding suggests that public policy may have been used inappropriately in Bob Jones as a way to regulate the activities of charities: M Harding (2014) (n 1) 208.

Regulating Charitable Activities  151

V. Conclusion Even in the face of racial discrimination, an issue with an unparalleled history of harm and violence in the US, the majority in Bob Jones had to resort to the doctrine of public policy, a doctrine of absolute last resort, to conclude that the impugned racially discriminatory activities under review vitiated charitable status at common law. Why was there a need to dig so deeply into the charity law toolbox to regulate this kind of activity? As we have seen, the common law of charity regulates activities – to the extent that it does – primarily through the requirement for exclusively charitable purposes. The orientation of the common law of charity around purposes poses hurdles to the regulation of activities, not just in the extreme facts of Bob Jones but also more generally. First, it is purposes rather than activities that are vetted for public benefit (meaning activities should not be ruled out as non-charitable on the basis that they lack public benefit). Second, it is difficult to conclude from a discrete activity that a charity is operating outside of its formal objects for a non-charitable purpose (meaning isolated missteps are difficult to address when ‘purposes’ are the regulatory frame of reference). Third, since activities are characterised by the common law based on the purposes they are carried on to further, activities carried on to further charitable purposes resist being characterised as non-charitable (meaning it is difficult for a charities regulator to take issue with how a charity chooses to further its charitable mission). These factors help to explain the appeal of public policy in Bob Jones. Public policy enabled a conclusion that the traditional pillars of charity law resisted. In fact, as mooted above, public policy may well be the safety valve for those limited instances in which the common law’s usual accommodating approach to activities could leave egregious activities unregulated. The question is whether charity law needs a better way to selectively regulate activities. If disputes over activities only arose in the most extreme of circumstances, then mooting an alternative approach might entail a solution in search of a problem. But debates in charity law are increasingly debates about activities and not simply purposes. While the common law’s enabling posture vis-à-vis activities is worth preserving, it bears noting that the facilitative approach of the common law toward charitable activities – the convention of characterising activities as charitable if they further charitable purposes – is an inheritance from a more structured and taxonomically tidy bygone era. In that comparatively simpler world, it was feasible for the common law to get by with the simplistic assumption that activities either did or did not further charitable purposes. Since the doctrine of public policy was always available as a regulatory safeguard if charities crossed way over the line, charity law could extend considerable deference to charities to determine for themselves how best to further their missions. The modern era is more complex. The taxonomically tidy world in which activities could be neatly categorised as charitable or non-charitable based on the purposes being furthered is dissipating. The trend of hybridisation means

152  Adam Parachin t­ raditionally distinct categories are conflating. To name but a few examples, business and charity are being blended via social enterprise, investing and business are being blended via modern investment structures, charity and politics are being blended via the increased intermingling of charities with government and charitable giving and transactions of exchange are being blended via hybrid donation arrangements.80 In the more complex world that we presently occupy the bright line taxonomic assumption that activities either do or do not further charitable purposes (are or are not charitable – full stop) is coming under intense pressure. Debates over the level of user fees – eg, tuition fees – charities may charge, the amount of political advocacy charities may indulge, the extent to which charities may fund their programming through business activities, etc, share something in common: they are all debates about whether (and, if so, how) activities should be restricted notwithstanding that they represent plausible means of furthering charitable ends. It is becoming apparent that whether an activity does or does not, strictly speaking, further a charitable purpose might not be all that we want to know. It is at least possible that select activities should be restricted notwithstanding that they represent plausible methods of furthering charitable ends and notwithstanding that they fall short of the kind of extreme activities the doctrine of public policy is meant to address. I have, for example, made this point elsewhere in relation to political activities. The question moving forward is how charity law can preserve its enabling posture vis-à-vis activities while still selectively regulating activities laden with policy concerns. Perhaps the best way to achieve this is via surgical statutory interventions through which specific rules or principles are adopted for specific activities. Doing so would bring greater transparency, rationality and integrity to the regulation of activities. Continuing with the status quo is likely to sustain the square peg, round hole approach to activities discussed in this chapter. This would mean continued reliance on public policy (with the kinds of attendant problems discussed above) and continued (if not accelerated) regulatory fudging through which activities are selectively regulated as though they were purposes, eg, tested for public benefit. Such an approach imbues charities regulators with excessive discretion. It means that activities furthering charitable ends are charitable except when charity regulators consider that they are not. The best way to preserve the principle that activities furthering charitable purposes are charitable while also acknowledging the need to selectively restrict certain methods of furthering charitable ends is through surgical statutory interventions supplying specific rules and/or principles for specific activities. This would ensure the best of all worlds. The autonomy of charities to pursue their ends

80 These and other examples are discussed in A Parachin, ‘ITA as Accessory and the Charity Gift Tax Expenditure Program: Blurred Lines and Shifting Boundaries’ in Jinyan Li, J Scott Wilkie and Larry F Chapman (eds), Income Tax at 100 Years: Essays and Reflections on the Income War Tax Act (Toronto, Canadian Tax Foundation, 2017) 15:1–31.

Regulating Charitable Activities  153 as they see fit would be substantially preserved, the regulatory requirements for charities would be clear(er) and the authority of charity regulators to regulate the activities of charities would be kept in check. If I am right, there are important lessons here for future statutory intrusions into the common law of charity. Statutory interventions should seek to remedy those things the common law does poorly. Without denying that codified definitions of charitable purposes can improve on the common law, it does not seem to me that the common law’s treatment of purposes is the only or even the primary source of confusion. The common law’s treatment of charitable activities is what should be improved upon through statutory intervention. Law reformers should consider this moving forward.

154

8 Redefining the Regulatory Space? The First Forays of the Irish Charities Regulatory Authority OONAGH B BREEN

I.  Introduction: The Difficult Births of Charity Regulators This chapter seeks to explore the question of the inherent value in charity ­regulation per se. What are the associated challenges in parachuting a new charity regulator into an already highly contested regulatory space? The first two decades of the twenty-first century have witnessed a concerted policy and legislative move towards a dedicated charity regulation model with five common law jurisdictions (including Ireland) electing to establish new charity regulators. In each of these cases, the charity regulator displaced the tax authority as the primary regulator but also had to negotiate the space over which other regulators held sway and into which charities fell, whether by way of form or function. Highlighting the fact that lack of charity regulation does not always equate with lack of regulation more generally, this chapter uses Ireland as a case study to explore the challenges that the need to accommodate the arrival of a new regulator presents both for those subject to regulation (ie, the charities) and also for those other competing statutory regulators sharing the public space. The establishment of the Irish Charities Regulatory Authority (CRA) under the Charities Act 2009 (the 2009 Act; the Charities Act) on 15 October 2014 introduced a new era in the regulation of charities in Ireland; with a regulator enjoying both supervisory and enforcement powers in respect of charities receiving statutory imprimatur. For the first time since the eighteenth century,1 a central 1 An Act for the Better Discovery of Charitable Donations and Bequests in 1763, 3 George III c 18, amended by 40 George III c 75. See further, OB Breen, ‘Waiting for the Big Wave: A Fifty-year ­Retrospective on the Ebb and Flow of Irish Charity Regulation’ in OB Breen, A Dunn and M Sidel (eds), Regulatory Waves: Comparative Perspectives on State Regulation and Self-Regulation Policies in the Nonprofit Sector (Cambridge, Cambridge University Press, 2017).

156  Oonagh B Breen register of charities qua charities is mandated, and from the commencement date all existing charities enjoying charitable tax-exempt status (some 8,400 bodies) were deemed to be registered by virtue of section 40 of the 2009 Act. For all other new or existing charities, an obligation to apply to the CRA for registration arose. Failure to register leaves those charities open to sanction under the Charities Act 2009, since it is an offence to hold oneself out as a charity and to be unregistered under section 39.2 With the commencement of the Charities Act in 2014, Ireland became the latest in a long line of common law jurisdictions to establish a charity regulator with registration powers, responsible for overseeing the charity sector and ensuring good governance and effective stewardship and use of charitable assets entrusted to the care of those entities. The grandfather of regulators in this respect, and for a long time the only example of such, is the Charity Commission of England and Wales (CCEW), as re-imagined under the English Charities Act 1960. The early twenty-first century saw a flurry of fledgling authorities with the New Zealand Charities Commission, established under the New Zealand Charities Act 2005, being the first to emerge on the scene.3 Scotland closely followed on the heels of New Zealand with its Office of the Scottish Charity Regulator (OSCR) in 2006.4 Northern Ireland’s Charity Commission (CCNI), established under the Charities Act (Northern Ireland) 2008, came into being in March 2009,5 while across the seas, the Australian Charities and Not-for-Profits Commission (ACNC) made its first appearance in 2012.6 In all cases, the establishment of the new regulator coincided with the promulgation of a statutory definition of charitable purposes7 and the creation of a register of charities. The bedding-down process for the majority of these regulators proved to be a difficult one – New Zealand’s Charity Commission was relatively short-lived and was disestablished on cost grounds in 2012, its powers being returned in-house to the Department of Internal Affairs.8 Interpretational difficulties encountered with the meaning of ‘public benefit’ in the Northern Ireland charities legislation meant

2 Charities Act 2009, s 46. 3 The Commission was established, in accordance with s 2 of the Act, on 1 July 2005. It also became the first to leave the scene in 2012. See below. 4 Established under Charities and Trustee Investment (Scotland) Act 2005, OSCR came into being with the passing of The Charities and Trustee Investment (Scotland) Act 2005 (Commencement No 2) Order 2006, made on 23 February 2006, which allowed Ministers to appoint the OSCR board. 5 The Charities (2008 Act) (Commencement No 1) Order (Northern Ireland) 2009. 6 In accordance with the provisions of the Australian Charities and Not-for-profits Commission Act 2012 as commenced by the Australian Charities and Not‑for‑profits Commission (Consequential and Transitional) Act 2012 on 3 December 2012. 7 Albeit in the New Zealand case this involved very little more than the restatement of the Pemsel headings in statute. 8 New Zealand Charities Amendment Act (No 2) 2012, s 7. See now, New Zealand Charities Services division within the DIA.

Redefining the Regulatory Space?  157 that despite the establishment of the CCNI in 2009, its ability to function effectively was greatly hampered, and the establishment of the register of charities was delayed until the subsequent passing of amending charities legislation in 2013.9 For its part, the ACNC endured great uncertainty regarding its future, working almost from the get-go under a real threat of abolition in Australia. A change of federal government in 2013 brought to power the Conservatives who, while in opposition, had opposed the ACNC’s establishment in 2012. In keeping with their election promises, the Conservatives set about the ACNC’s undoing and introduced in January 2014 the Australian Charities and Not-for-Profits Commission (Repeal) (No 1) Bill. The Bill proposed to dismantle the charity watchdog and to transfer its functions to the Australian Securities and Investments Commission and the Australian Taxation Office. Although it was debated at the end of ­Australian Parliament’s sitting in 2014, it did not go to a vote. It was only in F ­ ebruary 2015 that news of the ACNC’s reprieve emerged with the Minister for Social Services’ announcement that the abolition of the regulator was not a priority for him.10 In all five cases (Ireland, Scotland, Northern Ireland, New Zealand and Australia), the introduction of a charities regulator displaced existing regulatory agencies (primarily, the tax authorities) in the primary oversight role, but in Ireland’s case, the Attorney General and the Commissioners for Charitable Donations and Bequests (CCDB) now also found themselves surplus to requirements. In many cases, the need to accommodate the new role of the charities regulator alongside existing sectoral regulators (ranging from health and educational agencies to housing agencies) or in addition to existing functional regulators (such as the relevant companies regulator) requires a level of joined-up policy making and thinking that does not always occur in government circles. Taking Ireland’s most recent experience, this chapter examines the challenges of redefining the regulatory space upon the establishment of a new charities regulator. Does the establishment of a new charities regulator drop neatly into an existing jigsaw puzzle of regulatory pieces? Or must we pare back the powers of existing regulators or redesign our existing regulatory landscape to make room for a new kid on the block? Part II sketches out the regulatory landscape that existed prior to the commencement of the Charities Act 2009 and the lacuna that led to calls for a charities regulator. Part III discusses the emerging challenges of integrating the new supervisory agency amongst the existing regulatory agencies, with particular focus on Revenue and the Companies Registration Office. Returning to the inherent value of charity regulation per se, Part IV offers a comparative perspective on how other jurisdictions have addressed some of these regulatory challenges.

9 Charities Act (Northern Ireland) 2013. 10 See T Jacks, ‘Scott Morrison puts bill to abolish charity regulator on backburner’ The Sydney Morning Herald (Sydney, 7 February 2015) available at: www.smh.com.au/national/scott-morrisonputs-bill-to-abolish-charity-regulator-on-backburner-20150206-1378o9.html.

158  Oonagh B Breen

II.  The Irish Regulatory Landscape Pre-2014 Prior to the commencement of the Charities Act 2009, four key statutory agencies played oversight roles in the regulation of charities: namely, the Revenue Commissioners, the Companies Registration Office (CRO), the Attorney General, the Commissioners for Charitable Donations and Bequests (CCDB). A parliamentary committee, the Public Accounts Committee (PAC) had an ad hoc oversight role in certain instances. For none of these five was the regulation of charities a primary task; a factor that while leading to a situation of diverse multiple accountabilities also led to one of under-accountability. With the arrival of the Charities Regulatory Authority, the Attorney General and the CCDB have departed the regulatory scene, leaving the other agencies to renegotiate the regulatory space when it comes to charity oversight.

A.  The Revenue Commissioners Until October 2014, the Revenue Commissioners (Revenue) were the de facto regulator for charities in Ireland, placing Ireland in a similar category to that of the US and Canada. This role as ‘charities regulator’ was never one particularly sought by Revenue, but given the importance of charitable tax exemption, ­Revenue shaped Ireland’s common law approach to charitable status and public benefit. The absence of a dedicated charities regulator saw Revenue cast as the de facto primary regulator despite the multiplicity of public agents who shared responsibility for charity oversight. With few opportunities for the Irish courts to rule on the meaning of charitable purpose, Revenue decided on a case-by-case basis whether a charity met the Pemsel test11 and provided sufficient public benefit to warrant charitable taxexempt status. Since Revenue does not publish its decisions granting or refusing tax-exempt status, the reasoned basis for such decisions was often not known beyond the charity in question or its lawyers, hampering the development of the law in this regard.12 Revenue maintains a list of tax-exempt charities, which indicates the name of the charity in question, its CHY (or tax) number, and a contact address either for the charity or for its agent – but not the heading under which it has been granted tax exemption or any other details relating to the governing instrument of 11 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531. 12 Cf the approaches of the Australian Tax Office (www.ato.gov.au/Non-profit/Getting-started-fornon-profit-organisations/In-detail/Tax-concessions/Charities/Is-your-organisation-a-charity-/); the Canadian Customs and Revenue Agency (www.cra-arc.gc.ca/chrts-gvng/menu-eng.html); the UK’s HMRC (www.gov.uk/running-charity/money-accounts), all of which provide copious advice to charities. In contrast, Revenue guidance is minimal. Moreover, Revenue has withdrawn previous guidance on charitable trading under the guise of revision, but has then never re-issued, with Revenue advising the author that they preferred to deal with each case on an individual basis as it arose. This makes it difficult to establish both clarity of application and precedential decisions.

Redefining the Regulatory Space?  159 the charity.13 This list became publicly available only in 1998 with the advent of Freedom of Information legislation and an application thereunder;14 prior to which time even the names of those charities enjoying the privilege of tax exemption were withheld from public knowledge and closely guarded by Revenue as tax-related confidential information. In exercising its regulatory powers, Revenue required prospective charity applicants to satisfy it: on the fact that their governing instruments properly spoke to their charitable purposes and public benefit and also included certain core provisions relating to the profit non-distribution constraint; on the application of cy-près in the event of charitable dissolution; and on certain other governance requirements relating to the required number of directors or trustees (three) and to the financial thresholds for the preparation of audited accounts (annual income in excess of €100,000). Revenue copper-fastened this initial oversight by requiring prior Revenue consent to any subsequent changes to the governing instrument. Revenue typically followed up a decision to grant tax-exempt status with a once-off obligation on the charity to submit audited accounts within the following period of 18 months and thereafter no automatic scrutiny of charity accounts was likely to occur unless the charity applied for ‘eligible charity status’ to reclaim tax paid by donors on donations received.15 Given its ability to audit charities with the ultimate sanction of either tax exemption revocation and/or clawback of tax benefits, Revenue enjoys, in principle, a deterrence power not shared by other regulators in relation to charities. In practice, the limited human resources of Revenue’s charity division mean that revenue audits tend to arise less in the context of own initiative investigation and more in the rare case of public complaint triggering further scrutiny. If a charity was refused tax-exempt status, the applicant could appeal that decision on a point of law to the Tax Appeal Commission.16 Its published decisions, dating from 2016, reveal no charity related appeals.17

B.  The Companies Registration Office (CRO) For charities that chose to incorporate, registration with and reporting to the CRO was, and remains today, a requirement. The most common form of incorporation 13 See: www.revenue.ie/en/about/statistics/registrations-assessments-transactions-charitableexemption.html. 14 Office of the Information Commissioner, Case 98042 – Mr J Burns of The Sunday Times newspaper and the Office of the Revenue Commissioners (8 July 1999) available at: www.oic.gov.ie/en/Publications/Annual-Reports/Previous-Annual-Reports/1999-Annual-Report/Decisions.html. 15 See Revenue Commissioners, ‘Scheme of Tax Relief under Section 848a Taxes Consolidation Act 1997 for donations of money or designated securities made on or after 1 January 2013 to “Eligible Charities” and other “Approved Bodies”’ (CHY 3, 2013). 16 www.taxappeals.ie/en/determinations. 17 Established as an independent statutory body by the Finance (Tax Appeals) Act, 2015, the Tax Appeals Commission replaces the former Office of the Appeal Commissioners. The latter body had no listed charitable tax-exempt appeals on its website prior to its dissolution.

160  Oonagh B Breen chosen by charities is a public company limited by guarantee (CLG). Traditionally, one of the consequences of being a CLG is the annual requirement to file audited statements of accounts, regardless of the annual income or turnover of the charity since, until recently, public companies limited by guarantee could not avail of the audit exemption threshold.18 In the absence of a charities regulator, charitable companies, under company law, were more transparent and accountable than any other charitable entity. The quality of charitable company financial returns and the level of their ­compliance with company law requirements, however, varied greatly. In 2008, the Office of the Director of Corporate Enforcement (ODCE), in a targeted investigation of not-for-profit CLGs, examined the financial returns of 264 CLGs formed for some charitable, community or social purpose. In more than 25 per cent of cases, over 100 instances of non-compliance with the Companies Act were detected. According to the ODCE:19 • on 64 occasions, auditors certified that they were satisfied that the directors were entitled to lodge abridged accounts and the companies then filed abridged accounts, [even though] companies limited by guarantee were not entitled to file abridged accounts at that time;20 • in 30 cases, auditors reported a deficiency of capital [even though] companies limited by guarantee have no issued share capital; • on eight occasions, auditors failed to provide a complete audit opinion in accordance with the statutory requirement, and in a small number of other cases no audit was undertaken, despite it being then a requirement under company law. The statutory function of both the CRO and the ODCE is to ensure compliance with company law, and neither agency enjoys direct responsibility for charities – such that any further breaches of charity law underlying these regulatory failures were not further investigated by the ODCE. Thus, the siren of a company law breach did not trigger any action on the charity law side regarding proper stewardship. One might argue that this points to the need for a dedicated charity regulator. The need for such specific regulation was particularly pertinent when the ODCE prosecuted directors of charitable companies for breach of company law. In some instances, greater leniency was shown towards the malefactors because of the charitable nature of the enterprise involved. Consideration was not always

18 The law changed in this regard on 1 June 2015 with the commencement of the Companies Act 2014. See further below. 19 ODCE, ‘Annual Report 2008’ at 14. See further, OB Breen, ‘The Disclosure Panacea: A Comparative Perspective on Charity Financial Reporting’ (2013) 24 Voluntas 852. 20 The Companies Act 2014 changed the law in this regard so that from 1 June 2015, companies limited by guarantee can now file abridged statements of accounts. This practice is not regarded as good practice for charitable companies as the reduced disclosures undermines public trust and confidence in the charity sector.

Redefining the Regulatory Space?  161 necessarily given to the threat that such conduct could have on the stewardship of charitable assets.21 The Attorney General was never joined as a notice party to ODCE proceedings taken against charitable companies, despite the requirements of the Charities Acts 1961–1973; a matter described as an oversight by the ODCE in 2005.22 This situation might again point to the need for a charities regulator. With 44 per cent of all registered charities being incorporated,23 a sizeable constituency of charities would remain subject to dual regulation even upon the introduction of a standalone charity regulator. The regulation of charitable companies, with the advent of the charities regulator, is thus a contested space.

C.  The Attorney General and Commissioners for Charitable Donations and Bequests In line with many common law jurisdictions, the Irish Attorney General enjoyed a monopoly over the public enforcement of charity law. In his role as parens patriae, the Attorney General had locus standi to take cases in the public interest to protect either a charity or its beneficiaries. Interested or aggrieved parties who lacked direct causes of action in either tort or contract could seek the permission of the Attorney General to sue as a relator if the injury in question was to the public more generally, but such actions were normally rare.24 Given the Attorney General’s constitutional role as guardian of the Constitution and his political role as advisor to the government, charity law enforcement tended to have low priority – a factor not uncommon in other jurisdictions where the Attorney General also enjoys titular responsibility for charities.25 Irish experience showed that the Attorney General rarely acted on his own initiative and routinely exercised his discretion not to proceed against the charities or individuals even when prompted by the CCDB under its Charities Act 1961–73 powers.26

21 In The Director of Corporate Enforcement v The Ellis Tate Centre for the Arts Company Ltd, ­unreported, Letterfrack District Court, 26 September 2003, a successful ODCE prosecution of a charitable company for failing to keep proper books of account, the court imposed a relatively small fine because of the company’s charitable status. According to ODCE correspondence with the author, the factors that influenced the nominal fine of €100 included the guilty plea, the community service provided by the company and its dependence on fundraising for survival. 22 Mr Paul Appleby, then-Director of Corporate Enforcement at the offices of the ODCE in an ­interview with the author, 14 June 2005. 23 See Indecon, ‘Registered Irish Charities: Social and Economic Impact Report 2018’ (Charities Regulatory Authority, 2018) Table 9. 24 The absence of relator actions in the charity law arena may be more attributable to classic collective action problems than lack of cases of interest. See further, OB Breen, ‘Guardians of the ­Charitable Realm: Charitable Trust Supervision Procedure and Practice in the Common Law World’ (2016) 6 European Review of Private Law 1141–1164. 25 Ibid. 26 See K O’Halloran and OB Breen, ‘Charity Law in Ireland and Northern Ireland: Registration and Regulation’ (2000) Irish Law Times 1.

162  Oonagh B Breen Established in 1844 and given expanded powers in the Charities Acts of 1961 and 1973, the Commissioners for Charitable Donations and Bequests (CCDB) would have appeared as the most likely body to regulate charities pre-2014. Names, however, can be deceptive. In its 2002 Report on Charity Law Reform, the Law Society of Ireland described the role of the CCDB as ‘facilitative rather than regulatory’, with the Board having ‘powers rather than duties.’27 A reactive rather than a proactive body, the CCDB responded to requests from charitable trustees mainly to assist in completing trust property transactions or facilitating the management of charities. Chief amongst its powers was the power to frame cy-près schemes and schemes of incorporation for charities. Additionally, the CCDB enjoyed powers to appoint new charity trustees; to authorise disposition of lands held upon charitable trusts; to advise trustees experiencing difficulty in administering a charitable trust; to compromise claims by or against a charity; to invest charity funds; and to examine summary forms received from the Probate Office supplying details of all charitable bequests. What the CCDB lacked, however, were the all-important enforcement teeth.28 It had no power to adjudicate on charitable status, relying instead on Revenue’s determination of tax exemption as a prerequisite to exercising its powers. It maintained no central register of charities, and while ostensibly it had powers to take enforcement actions, it lacked the necessary investigative powers, resources and will to progress a case to this stage. In many instances, it also required the prior (and rarely forthcoming) consent of the Attorney General to initiate action.29 Both the Attorney General and the CCDB departed the regulatory scene with the commencement of the Charities Act 2009 and the establishment of the new CRA. The CCDB was dissolved on 16 October 2014 and its powers and staff transferred to the new regulator,30 with one of its commissioners appointed to the CRA Board. In the case of the Attorney General, section 38 of the 2009 Act provides that all functions relating to charities that were vested in the Attorney General be transferred to the CRA and references in enactments relating to charities to the Attorney General should now be construed as references to the CRA. Thus, in contrast to other common law jurisdictions, no provision is made in the 2009 Act for the Attorney General to be a notice party in future charity litigation or to have 27 Law Society of Ireland, Charity Law: The Case for Reform (Dublin, Law Society of Ireland, 2002) 103. 28 See, eg, Charities Act 1961, s 23 and s 24, which empower the Board to sue to recover misapplied or concealed charitable gifts. Both sections are of limited value given the absence of an investigatory role on the part of the Board to uncover such situations in the first place. 29 See Charities Act 1961, s 23 (providing that ‘the Board may, with the previous consent of the Attorney General, sue for the recovery of any charitable gift intended to be applied in the State which is improperly withheld, concealed or misapplied’). Similarly, access to the courts is provided in s 26 by enabling the Board to certify cases to the Attorney General. While the CCDB exercised this power on several occasions prior to 2000, the Attorney General always exercised his statutory discretion under sub-s (2) not to proceed in any of these cases. See K O’Halloran and OB Breen, ‘Charity Law in Ireland and Northern Ireland – Registration and Regulation’ (2000) Irish Law Times 1. 30 Charities Act 2009, ss 81 and 82.

Redefining the Regulatory Space?  163 any intervention or appeal powers in charity proceedings.31 This exclusion of the Attorney General from all matters charitable is subject to one express exception in the 2009 Act, relating to the treatment of religious charities.32 Explaining the rationale for the abolition of the Attorney’s role in the Seanad Debates on the Charities Bill in 2008, the sponsoring Minister of State commented: The Attorney General has, up to now, had a role as the “protector of charities.” Such a role might involve initiating legal proceedings in defence of charities, participating in proceedings brought by others, or carrying out certain functions under the Charities Act 1961. In consultation with the Office of the Attorney General, in the context of a new statutory regulatory framework for charities, with a strong yet supportive authority as the centrepiece, it has been agreed that it is no longer essential for the Attorney General to have such a role.33

This unchallenged stance is interesting in that a similar claim to the creation of more robust regulatory frameworks could equally be made by each of the common law jurisdictions mentioned at the start of this chapter, none of which decided to dispense with the Attorney General’s oversight of charities in their reform processes. In abolishing the potential for the Attorney General to play an interventionist role, Ireland has thus been either far more pragmatic than its common law counterparts in recognising the limited practical involvement of the Attorney in charity law enforcement or simply foolhardy in entrusting unspecified common law powers to a fledgling and, as yet, untested statutory regulator.34

D.  The Public Accounts Committee In the pre-CRA period, one unusual catalyst for better supervision and law reform has been the Oireachtas Public Accounts Committee (PAC). This public spending watchdog is one of the key Oireachtas committees, charged with ensuring that there is accountability and transparency in the way government agencies allocate, spend and manage their public finances and in guaranteeing that the taxpayer receives value for money. In early 2014, prior to the commencement of the ­Charities Act, PAC opened public inquiries into claims that two national disability charities in receipt of substantial public subsidies were not properly accounting

31 Cf ss 318 and 326 of the English Charities Act 2011 (regarding intervention and references by the AG). 32 Section 3(5) of the 2009 Act expressly requires the consent of the Attorney General before the CRA can make a finding that a gift for the advancement of religion is not of public benefit. Interestingly, an appeal against such a finding does not lie to the new Charities Appeal Tribunal (s 3(9)) but presumably must be heard directly by the High Court. 33 Deputy John Curran, Seanad Éireann Debate, Vol 192 No 8 at [428] (Second Stage Debates, 26 November 2008). 34 On the role of Attorneys General in charity law enforcement, see Breen, ‘Guardians of the Charitable Realm’ (2016) (n 24); see also M Synge, ‘The Attorney General and the Charity Commission: one rule without reason?’ (2016) Public Law, 409.

164  Oonagh B Breen for funds received.35 These inquiries brought widespread public attention to poor governance practices, mismanagement of charitable funds and breaches of fiduciary duties of loyalty in both cases, resulting in board changes and necessary reform. The PAC was not, however, a panacea for a charity regulator; if anything, the work of PAC in the charity sphere pointed to the specific need for effective charity regulation. PAC’s remit meant that it could only raise questions relating to the direct public funding of charities and not general charity accountability.36 This is not necessarily surprising. Political accountability mechanisms are often relatively weak in terms of good accountability control. There are many thousands of charities receiving public funding and making multitudes of decisions daily while politicians (and their oversight committees) are few and have several competing priorities as well as severe time and cognitive constraints. It follows that there are only a very limited number of charitable decisions or actions which political committees can attend to in any detail, even on an ad hoc basis, leaving the vast majority of charities largely without oversight. Moreover, as the Irish Supreme Court found in Kerins v McGuinness, parliamentary committees must act within their terms of reference. When individuals voluntarily accept invitations to come before such committees, the court can intervene if PAC engages in an unlawful and unfair process by acting as a whole in a manner which lead to a citizen accepting an invitation on one basis but being treated differently on attendance.37 To summarise the pre-2014 regulatory landscape, although many statutory agencies interacted with charities for tax law, company law, and other fiscal/grantmaking purposes, no clear lines of accountability for those entities existed qua charities.38 Revenue’s CHY list did not function as a charity register, containing incomplete and often outdated information. Revenue’s limited resources to actively scrutinise charity accounts meant that there was no external regulatory oversight of unincorporated charities’ accounts. Company law changes introduced by the Companies Act 2014 lowered considerably the standard of reporting for CLGs. This lower standard directly affects the accountability of charitable companies, which are to a large extent otherwise exempt from the financial reporting requirements of the Charities Act. Moreover, the absence of both published Revenue guidance and case law opportunities for judicial interpretation led to a stagnation of charity law and enforcement in Ireland. The advent of the disability

35 See H McGee, ‘PAC to recall entire CRC Board over Payoffs’ The Irish Times (Dublin, 20 January 2014); A Beesley, ‘PAC insists on Rehab Pensions and Pay Disclosure’ The Irish Times (Dublin, 10 April 2014). 36 See OB Breen, ‘Recent Developments in Irish Charity Law: Tsunami or Rising Tide to Lift All Boats?’ in R Hüttemann et al (eds), Nonprofit Law Yearbook 2014 (Germany, Carl Heymanns Verlag, 2014); OB Breen ‘Long Day’s Journey: The Charities Act 2009 and Recent Developments in Irish ­Charity Law’ (2014) 17 The Charity Law and Practice Review 91. See also, Kerins v McGuinness & Ors [2019] IESC 11 (SC). 37 Kerins v McGuinness & Ors [2019] IESC 11 (SC). 38 M Bovens, The Quest for Responsibility: Accountability and Citizenship in Complex Organisations (Theories of Institutional Design) (Cambridge, Cambridge University Press, 1998).

Redefining the Regulatory Space?  165 charity scandals culminated in renewed pressure on government to commence the Charities Act 2009 and to establish the long-awaited charities regulator in October 2014.

III.  Introducing the New Kid on the Block: The Charities Regulatory Authority The Charities Act 2009 introduced for the first time a statutory definition of charitable purpose and established the new Charities Regulatory Authority (CRA), placing Ireland in a similar category to neighbours, Northern Ireland, Scotland, and England and Wales, which all have independent statutory charity regulators. The CRA is tasked with: creating a register of charities; adjudicating upon charitable status (permitting entry onto the register);39 and reviewing compliance of registered organisations with the Act’s requirements relating to charity governance and stewardship of charitable assets,40 financial accountability,41 and achievement of charitable mission. The establishment of the CRA is intended to increase charity transparency and public accountability. The CRA’s own oversight procedures are open to scrutiny: the CRA is required to issue reasoned decisions when refusing to register a charity or revoking a registration.42 These decisions are themselves subject to appeal to a new Charities Appeal Tribunal, which is required to conduct its inquiries in public.43 The CRA has a statutory board of 12 members drawn from the accounting, legal and charity world. Supported by a staff of 33, the CRA had a budget line of €4.446 million in 2018. This represents a 64 per cent increase on its 2016 budget, illustrating that the regulator is still in growth mode four years after its establishment.

A.  The Charities Register – Establishing a Presence Upon its establishment in October 2014, the register of charities was pre-­populated with the details of 8,400 tax-exempt charities that were thereby deemed to be automatically registered. Since its establishment, the CRA has endeavoured to contact these organisations to electronically update and supplement the basic Revenue details, which form the basis of the register.44

39 Charities Act 2009, s 39. 40 Ibid, s 14(1). 41 Ibid, ss 47–53. 42 Ibid, ss 43 and 44. 43 Charities Act 2009, s 78. The five members of the CAT were appointed on 1 August 2016. To date, no hearings have been held or determinations made. 44 The Register of Charities can be accessed at: www.charitiesregulatoryauthority.ie/en/cra/pages/ CharitySearch.

166  Oonagh B Breen The register makes publicly available information relating to a charity’s objects, its legal form, its trustees, and its annual report to the Regulator. Since July 2019, the register also displays a charity’s total gross income for the relevant financial period and a breakdown of its sources of income (where required and/or provided).45 Charities supply further details about their operations at the time of registration which are not publicly disclosed on the face of the register. These include full details of banking arrangements, trustee contact details, and information on fundraising plans. There is also an opportunity for a charity to declare to which self-regulation codes (if any) it is currently a signatory. Charities must also upload a copy of their Revenue-approved governing documents along with a trustee declaration that the shared information is correct. At the time of writing, there are 9,700 registered charities on the register,46 a significant increase from the 9,061 charities recorded on the register of charities at 31 December 2017.47 Of the original 8,452 charities that were automatically deemed to be registered under section 40 of the Charities Act at the establishment of the register in October 2014, 7,220 remained in December 2017.48 As part of its business plan for 2017, the CRA undertook a process to clean the register of dormant and defunct charities and organisations that should never have been placed on the register in the first instance, amounting to between 730 and 1,825 charities.49 Additionally, by the end of 2017, the CRA had registered a total of 1,841 new charities since its establishment in 2014, which at that point accounted for 20 per cent of the register.50 Challenges are emerging regarding the sectoral awareness of the need to register, the correct classification of charitable entities and the separation of tax and charity status matters, each of which is now discussed below.

i.  Is there Anybody Out there? The Inherent Challenges in Registering a Sector By the end of 2017, 2,550 of the 8,452 deemed charities had still to engage with the CRA. Revenue’s contact list was out of date for many of these entities; the CRA’s subsequent correspondence, which relied on this information, did not reach the intended recipients. The initial lack of publicity surrounding the new regulator meant that there was little public awareness or even charity board awareness of the agency or the need to take steps to update register entries.51 Of these 2,550 45 CRA, ‘Important Notice re: recent Annual Reports filed’ (CRA, 3 July 2019). 46 See: www.charitiesregulator.ie/en/information-for-the-public/search-the-charities-register. 47 CRA, Annual Report 2017 (CRA, 2018) 14. 48 Ibid. 49 Author correspondence with the CRA, 21 April 2017 (on file with author). 50 CRA, Annual Report 2017 (CRA, 2018) 14. 51 Compare the Irish registration approach with that of the CCNI, which offers several guidance documents and tools to help charities navigate the registration process. These resources include registration workshops, an online registration tutorial, a guide outlining the common mistakes made by

Redefining the Regulatory Space?  167 defaulting charities, 1,318 had had no engagement with the CRA at all.52 This figure, while alarming, was 56 per cent lower than the corresponding 2016 figure of 1,825 defaulting deemed charities. The CRA has, over recent years, attributed this level of default to dormant charities that need to be removed from the Register. Work at their removal has proceeded, with more than 1,000 charities being deregistered since 2016.53 ­Nevertheless, non-engagement of existing charities remains an issue. In April 2017, the CRA reported that more than 800 charities that engaged with the CRA initially had since double-defaulted on their annual reporting duties in 2015 and 2016.54 Aside from those tax-exempt charities that were automatically registered, non-tax-exempt charitable organisations that existed prior to October 2014 were required to apply directly to the CRA for registration within six months of the register’s establishment if they wished to continue to operate or carry out charitable activities in the state.55 With the passing of the April 2015 deadline, only 200 of the estimated 4,000 unregistered charities had begun the formal registration process.56 This poor response rate forced the Minister for Justice to extend the statutory period for a further period of 12 months.57 The absence of a CRA media presence (both formal and social), the lack of a CRA budget for a nationwide education and information programme, and the absence of CRA written guidance to assist non-profit and community organisations attempting to navigate the registration process were undoubtedly contributory factors to the low level of applications by the April 2015 and indeed April 2016 deadlines.58 Failure to register while operating as a charity is an offence under the Charities Act.59 In 2017, the CRA took its first successful prosecution under section 41 of the Charities Act against Oliver Williams for misrepresenting Twist Charity as a registered charitable organisation when this was not the case. Williams was entities when registering with advice on how to avoid these pitfalls and a number of CCNI Guidance documents on the meaning of the charitable purpose and public benefit concepts. See: www.charitycommissionni.org.uk/manage-your-charity/registration-support/. 52 CRA, Review of Registered Charities’ Compliance Rates with Annual Reporting Requirements 2017 (December 2018) 4. 53 According to CRA, Annual Report 2016 (CRA, 2017) 314, s 40 charities were removed from the Register. This number more than doubled in 2017 when a further 699 charities were removed – see CRA, Annual Report 2017 (CRA, 2018) 14. 54 Author correspondence with the CRA, 21 April 2017 (on file with author). 55 Charities Act 2009, s 39(4). 56 The CRA has made an exception for non-CHY charities that qualify as ‘educational bodies’, stating on its website that such charities should not start the registration process yet but should await further instructions from the CRA – see: www.charitiesregulator.ie/Website/CRA/CRAweb.nsf/page/ whatwedo-regcharities-en. 57 See Department of Justice, ‘Minister Fitzgerald extends deadline for charities to register with the Charities Regulatory Authority’, press release (Department of Justice, 17 April 2015): www.justice.ie/ en/JELR/Pages/PR15000111. The deadline for registration was extended to 16 April 2016. 58 The CRA’s initially poor attempts to engage with stakeholders can be contrasted with the early efforts of the ACNC to make its presence felt in Australia; see, eg: ACNC, ‘ACNC hits the road in 2013’, press release (ACNC, 21 December 2012). 59 Charities Act 2009, s 41.

168  Oonagh B Breen also prosecuted under section 46 for advertising, requesting and accepting donations for an unregistered charitable organisation. Sligo District Court ordered the closure of an unregistered charity shop and soup kitchen and sentenced Williams to a five-month suspended sentence on each count.60 The prosecution did not significantly raise the profile of the regulator, but public attention was captured by media revelations of poor governance and financial practices in one of Ireland’s largest animal welfare charities, Animal Heaven Animal Rescue (AHAR),61 and the evidence uncovered by investigative journalists led to the CRA imposing intermediate sanctions on the charity in 201762 and appointing four new charity trustees to the charity in 2018.63 The CRA continues to share this enforcement space with Revenue, however, which successfully obtained an interlocutory Mareva injunction against AHAR in April 2019, restraining it from reducing its assets below €191,000 or transferring its lands to another charity.64

ii.  The Nature of the Beast: Naming the Structure Teething problems are inevitable with the creation of any new registration system. Normally, attempts to mitigate the most likely problems involve providing guidance, running registration road shows and providing regular updates to the sector to encourage its ongoing engagement with the new system. Indeed, this has been a common factor in the early roll-out phase of charity regulation in all other jurisdictions. The CRA was slow to publish guidance on how it would interpret the new statutory tests for charitable purposes or to give any insights into its views on the practicalities of proving public benefit.65 In 2018, four years after the commencement of registration, the CRA belatedly published two guidance documents, What is a Charity? (January 2018) and CRA Registration Guidelines (May 2018). Whereas the provision of such guidance may not have been an immediate concern of the CRA, given its primary focus on deemed charities, the lack of CRA guidance led to errors on the register which, with a little guidance or ongoing CRA scrutiny of new filings, could have been avoided. 60 CRA v Oliver Williams, unreported, Sligo District Court, 2 February 2017 (Judge Kevin Kilraine). 61 RTÉ, ‘Prime Time Investigates AHAR’ (RTÉ, 16 January 2017); RTÉ, ‘Live Line with Joe Duffy’ (RTÉ, 17 January 2017). 62 Charities Act 2009, s 73. 63 The CRA had originally intended to appoint two new charity trustees to AHAR’s board. AHAR resisted the regulator’s move, sending private messages to its followers on Facebook which cited the regulator’s move as a ‘take-over’. The regulator responded by doubling the number of nominees to four on the AHAR board – see The Governance Company, Corporate Governance Review 2018 (The Governance Company, 2018) 15. 64 M Carolan, ‘Revenue secures High Court orders over animal charity debt’ The Irish Times (Dublin, 4 April 2019). 65 This approach is at variance with that adopted by most other new regulators, who generally provide such guidance ab initio. See the guidance material of the ACNC at: www.acnc.gov.au/ACNC/ Register_my_charity/Who_can_register/ACNC/Reg/Who_can_register.aspx?hkey=2d466857-a591418c-bbf7-8c247b73248b; and CCNI, ‘The Public Benefit Requirement’ (CCNI, December 2013) available at: www.charitycommissionni.org.uk/media/40577/ccni-pbr1-public-benefit-requirementv20.pdf.

Redefining the Regulatory Space?  169 One simple example relates to legal structure. When selecting the structure that best describes them, applicant charities are faced with a list of 14 separate options.66 Little explanation is provided of these categories, which includes the options of ‘private charitable trust’ and ‘other trust’. The term ‘private charitable trust’ has a specific statutory meaning under section 54(3) of the Charities Act 2009 and refers to a charitable trust that is not funded by donations from the public. The practical difference between a private charitable trust and other charitable trusts is that while all charitable trusts must file an Annual Report with the CRA, the CRA will not make the Annual Reports of private charitable trusts publicly available. The category ‘private charitable trust’ was created to cater predominately for family foundation trusts that do not engage in public fundraising. Unless one reads the Charities Act 2009 very closely, however, one will not appreciate the difference between the ‘private charitable trust’ and the unfortunately named ‘other trust’. Filing evidence would indicate that this difference has been lost on many charity trustees. By April 2017, 386 charities had chosen ‘private charitable trust’ as their governing form over 165 that had categorised themselves as ‘other trusts’.67 A sample audit by the author of the first 25 private charitable trusts reveals that over half of these bodies are not actually private charitable trusts, as they actively fundraise from the public. The confusion amongst charities in selecting their governance form is understandable. The ‘other trust’ label is unhelpful and could better have been called ‘public charitable trust’. Regardless of labelling, some guidance on the meaning of ‘private charitable trust’ and its restricted applicability is required.

iii.  Clash of the Titans – Revenue and the CRA The CRA may now oversee the granting of charitable status under the ­Charities Act but Revenue still plays an important role when it comes to charitable tax exemption. The Charities Act expressly affirms Revenue’s continuing independent tax oversight of charities. Under section 7, Revenue is not bound by the findings of the CRA when exercising its powers under the Tax Acts either to levy tax or exempt any entity from its payment. Section 7(2) expressly frees Revenue from any CRA determination as to whether a charitable purpose is of public benefit. Moreover, it should be recalled that the newly defined statutory list of charitable purposes in section 3 represents only those headings for which Revenue was prepared to grant tax-exempt status in the past or would be prepared to do so in the future. The statutory list, as it stands, is thus aligned with current Revenue

66 The Register provides 14 options: limited company, association, public limited company, private limited company, company limited by guarantee, limited liability partnership, private unlimited company, branch of foreign company, private charitable trust, other trust, cooperative, friendly society, Royal Charter governance, and other. 67 Search conducted by author in the Register of Charities on 9 May 2017.

170  Oonagh B Breen practice, but as the CRA continues to gain experience in making its own charity registration decisions, room for divergence between the regulators exists in their interpretation of the parameters of ‘charitable purpose’.68 The Charities Act enables the CRA to enter memoranda of understanding with other regulators to facilitate better administrative cooperation.69 Scotland provides a good precedent for this approach where OSCR entered into a Memorandum of Understanding (MOU) with Her Majesty’s Revenue and Customs (HMRC) regarding determinations of charitable status.70 The situation, if anything, was even more complicated in Scotland, given that OSCR has to apply the Scottish charity test under the Charities and Trustee Investment (Scotland) Act 2005, whereas HMRC determines tax exemption on a UK-wide basis under the provisions of the English Charities Act 2011. To date, Revenue and the CRA have agreed upon common requirements for registration71 and charities must register with the CRA before they can apply to Revenue for tax exemption. The two agencies entered into an MOU together in 2016.72 The CRA Business Plan for 2018 committed the CRA to entering a minimum of four MOUs with ‘relevant regulators’ as a key objective by the end of 2018.73 Progress on this front remains slow and it is understood that to date no other MOUs have been signed, apart from the Revenue MOU, which itself remains unpublished.

B.  Regulatory Reporting Requirements: Navigating the ‘To Who’ and the ‘What’ With any new regulatory regime, one of the chief obstacles to be overcome if public support is to follow is to prove that the inevitable administrative burden inherent in the setting up of the new framework serves a useful purpose. One of the policy objectives of the Irish charitable regulatory regime is to increase transparency and public accountability of charities. To this end, the act of registration is merely one step towards a more significant end in that it places the registered charity on the radar of both the regulator and the public (whether in the form of public donors or public beneficiaries). To understand better where a charitable entity sits on the 68 As of 31 December 2017, the CRA had registered a total of 1,841 new charities in Ireland since its establishment. See CRA, Review of Registered Charities’ Compliance Rates with Annual Reporting Requirements 2017 (CRA, December 2018) 4. 69 Charities Act 2009, s 33. By Charities Act 2009 (Section 33) Order 2017, SI 2017/586, the Minister of State at the Department of Rural and Community Development designated the Revenue Commissioners as one of 15 prescribed regulators with which the CRA could enter into cooperation agreements. 70 HMRC/OSCR, Memorandum of Understanding between the Scottish Charity Regulator and HM Revenue & Customs (Charities) (OSCR, 2015). 71 CRA, Charities Regulator Requirements for Registration (CRA, 2017). 72 CRA, Memorandum of Understanding between the Office of the Revenue Commissioners and the Charities Regulatory Authority (CRA, March 2016); see further OB Breen and PA Smith, Law of Charities in Ireland (Dublin, Bloomsbury Professional, 2019) 160–162. 73 CRA, Business Plan 2018 (CRA, 2018) 17.

Redefining the Regulatory Space?  171 spectrum of charity law compliance requires scrutiny of its submitted reports and returns. And the nature of that very scrutiny – what it entails, what it excludes, and who carries it out – lies at the heart of effective regulation. Creating a new reporting regime, particularly when simultaneously establishing a new regulator, presents its own set of challenges. One wants to extract from the reporting entity the ‘right information’ (both in terms of relevance and detail). In respect of this information, one then needs to ask the ‘right questions’; those to which the answers can best assist the regulator to triage respondents into high, medium and low risk categories. Most importantly, the regime must be adequately resourced to ensure that there is regulatory action when the information arrives and a regulatory response if it does not (whether in the form of greater outreach, road shows and workshops or warning reminders of information due but not yet received). Ultimately, there needs to be an understanding on the part of the regulator as to when good regulation requires proactive engagement on the basis of reporting disclosures made. The matter is further complicated when existing regulators in the field already impose reporting requirements on entities now to be regulated under the Charities Act. Better regulation seeks to minimise dual reporting by making one regulator the chief collector and main dispenser to other interested regulators.74 The secret to success in this ‘passporting’ of information is to ensure the nomination of the correct primary regulator in the first instance. The three premises underpinning financial reporting in the Charities Act indicate a strong awareness by the Act’s drafters of the importance of such an outcome: (a) The CRA would focus on developing a financial reporting regime for those charities not already filing annual statements of accounts with other regulators, namely unincorporated charities. (b) The CRO would transfer to the CRA copies of the annual financial statements filed by charitable companies, thereby ensuring CRA oversight without resorting to dual reporting. (c) At the time of the passing of the 2009 Act, companies limited by guarantee, regardless of income threshold, could not avail of the audit exemption more generally open to private companies, nor could they avail of the option of filing abridged accounts. The CRA was thus assured of external scrutiny of charitable company accounts even if it could not control the format or content of those accounts via its regulations. By adopting Revenue’s audit threshold of €100,000 for unincorporated charities, it could create a bespoke reporting framework for these entities subject to either independent review or audit while receiving a copy of audited statement of accounts for every incorporated charity, regardless of size. 74 Department of Taoiseach, Regulating Better: A Government White Paper setting out six principles of Better Regulation (Dublin, The Stationary Office, 2004). P Hampton, Reducing administrative burdens: effective inspection and enforcement (HM Treasury, 2005).

172  Oonagh B Breen What looked like a relatively effective compromise in terms of rigour and pragmatics collapsed with the entering into force on 1 June 2015 of the Companies Act 2014. Under this Act, a charitable company limited by guarantee, having a balance sheet total of not more than €4.4 million and a turnover of not more than €8.8 million, can now avail of an audit exemption and the ability to file abridged statements of account under company law, leaving the CRA powerless to require an audit under charity law.75 The significance of this change should not be underestimated: in 2015, 24 per cent of charitable companies elected to file abridged statements of account, leaving regulators and the public with no analysis of those ­organisations’ income or expenditure (including sources of income).76 This number rose to 40 per cent for charitable companies in 2017.77 The poor interfacing of charity and company law in this regard creates a financial reporting information asymmetry for charities. Under proposed charity reporting regulations,78 all unincorporated charities with incomes above €25,000 would be required to file bespoke annual returns subject to external scrutiny (comprising either an independent review or full audit) whereas the preparation of charitable company accounts with a turnover anywhere up to €8.8 million would be audit free, with no obligation to engage in the lesser form of independent review under company law. The untenable nature of this distinction prompted the regulator to seek amendment of the Charities Act to allow the CRA more effective oversight of charity corporate accounts. Under the auspices of the Department of Justice, the General Scheme of the Courts and Civil Law (Miscellaneous Provisions) Bill 2017 provided for the amendment of the Charities Act to require charitable companies to meet the same charity accounting standards as unincorporated charities under the CRA’s supervision. The Heads of Bill were approved in July 2017, but that same month, responsibility for charity regulation was transferred to the newly established Department of Rural and Community Development (DRCD). DRCD assumed responsibility for the amending legislation, which is now to form a standalone Charities (Amendment) Bill. The Bill was listed for pre-legislative scrutiny in the Summer 2019 parliamentary sittings,79 but this delay has caused the CRA to

75 Companies Act 2014, ss 334 and 1218; Charities Act 2009, s 48. The Charities Act does not provide a mechanism to increase the level of corporate scrutiny of corporate charities set by the Companies Act. The Companies Act 2014, s 1220, however, allows for a lesser level of CRO scrutiny to occur upon agreement with the CRA. 76 Benefacts, Nonprofit Sector Analysis (Benefacts, 2017) 19. Available to download at: https://analysis2019.benefacts.ie/. 77 Benefacts, Nonprofit Sector Analysis (Benefacts, 2019). Available to download at: https://analysis2019.benefacts.ie/. 78 See CRA, Public Consultation on the draft Charities (Accounting and Reporting) Regulations (CRA, November 2016) (www.accaglobal.com/content/dam/ACCA_Global/Technical/memadv/CRAAccounting-and-Reporting-Regulations-Submission-Nov-2016.pdf) as updated by the Regulator’s public comments at The Wheel Conference 2017, (Croke Park, Dublin, 28 June 2017). 79 Office of the Government Chief Whip, ‘Legislation Programme Summer Session 2019’ (Office of the Government Chief Whip, April 2019) 9.

Redefining the Regulatory Space?  173 miss delivery on its commitment to present draft accounting and reporting regulations to the Minister (which are dependent upon the new legislation) by the end of 2018.80 In the absence of financial reporting regulations which would apply equally to all charities (and for which amending legislation is first required to level the playing field between unincorporated and incorporated charities), the CRA has refrained from issuing financial reporting regulations by unincorporated charities (for which power currently exists under section 48 of the Charities Act) and in light of same, it has declined to publish any of the annual statements of account filed by unincorporated charities to date. Members of the public have also been refused sight of some financial statements, notwithstanding the regulator’s duty under section 54(1) ‘to make available for inspection by members of the public all annual reports and documents attached thereto that remain in its keeping’. Five years into Irish charity regulation, the financial statements of 1,650 unincorporated charities – 37 per cent of all registered charities – are not publicly available,81 leading to less public transparency and accountability than should exist in a bespoke charity regulation regime.

IV.  Regime Change: Lessons from Other Jurisdictions What can Ireland learn from the experiences of other common law jurisdictions in its reform of charity law and establishment of a new independent charity regulator? Four jurisdictions have reviewed their charity regulatory framework in the past seven years (England and Wales, Australia, Scotland, and New Zealand). As section 6 of the Irish Charities Act requires the Minister to carry out a similar statutory review of the operation of the Irish Act within five years of the Act’s commencement, Ireland will embark upon a similar review in October 2019. Of the four jurisdictions engaged in review, only England and Wales have reached the stage of a statutory response82 to the formal review report (carried out by Lord Hodgson in 2012)83 and subsequent consultation and amending ­legislation.84 The Australian review (under the auspices of the McClure Commission) published its report in August 2018,85 but a formal government response to 80 CRA, Business Plan 2018 (CRA, 2018) 16. 81 Benefacts, Nonprofit Sector Analysis (Benefacts, 2019) (n 77). 82 Cabinet Office, Government Responses to: 1) The Public Administration Select Committee’s Third Report of 2013–14: The role of the Charity Commission and ‘public benefit’: Post-legislative scrutiny of the Charities Act 2006 and 2) Lord Hodgson’s statutory review of the Charities Act 2006: Trusted and Independent, Giving charity back to charities (Cm 8700, September 2013). 83 R Hodgson, Trusted and Independent: Giving charity back to charities. Review of the Charities Act 2006 (London, The Stationary Office, 2012), hereinafter ‘The Hodgson Report.’ 84 Charities (Protection and Social Investment) Act 2016. 85 Australian Charities and Not-for-profits Commission, Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislation Review. Report and Recommendations (The Australian Government, The Treasury, August 2018), hereinafter ‘The McClure Commission Report’.

174  Oonagh B Breen its recommendations is still awaited. Both New Zealand and Scotland are engaged in public consultation and preparation of report recommendations at the time of writing.86 In comparing the areas reviewed by these different jurisdictions, it is interesting that all reviews to date have examined the role and powers of the respective charity regulator. Questions also commonly focused on the purpose and content of the charities register and operational processes relating to charity registration and de-registration. The recommendations of both the Hodgson Report (in England and Wales) and the McClure Commission Report (in Australia) both pointed to the need for ‘red tape reduction’ when it comes to charity regulation. The Hodgson Report recommended that ‘The Government … should consider the totality of the regulation facing charity trustees with a view to reducing it where possible’.87 For its part, the McClure Commission recommended that in order to reduce red tape, ‘the Commonwealth Government should mandate that departments and agencies are required to use the Charity Passport and must not seek information from registered entities that is already available through the Charity Passport’.88 Under the Australian Charity Passport regime, regulatory information provided to the Australian Charities and Not-for-Profit Commission (ACNC) is shared electronically with ‘ACNC Passport Partners’, ie, authorised government agencies recognised by the ACNC. The rationale for this system is to reduce the amount of information that charities must report to different federal and state government agencies, in line with the development of the Australian ‘report once, use often’ reporting framework. Key to this system of information-sharing is the scope of data covered – not only the charity’s core information and key governance documents, but also annual financial returns made to the ACNC and notice of enforcement outcomes taken against the charity are all shared.89 The feature that makes the ACNC report regime a workable solution is the primacy that it accords to the ACNC as the principal regulator that holds and shares all pertinent information. In its 2018 report, the Irish Consultative Panel on Governance recommended that ‘the Charities Regulator should promote efforts to streamline compliance and reporting duplication between State bodies’.90 The CRA is currently conducting a feasibility study for a ‘Charity Passport’ Scheme in Ireland. It is not, however, 86 Scottish Government, Consultation on Scottish Charity Law (Scottish Government, January 2019) – the public consultation in Scotland closed on 1 April 2019; New Zealand Government, Modernising the Charities Act 2005 Discussion document (February 2019) – the public consultation in New Zealand closed on 31 May 2019. 87 ‘The Hodgson Report’ (n 83) 42. 88 ‘The McClure Commission Report’ (n 85) 108. 89 For further information, visit: www.acnc.gov.au/about/red-tape-reduction/charity-passport. In presenting its 2016–17 Annual Report to Parliament, the ACNC reported that use of the Charity Passport had increased in 2017 with 20 government agencies using it to access charity data. See: www.acnc. gov.au/sites/default/files/Download%20full%202016-17%20%20ACNC%20Annual%20Report%20 %5BPDF%208.45MB%5D.pdf. 90 CRA, Report of the Consultative Panel on the Governance of Charitable Organisations (CRA, April 2018) 39.

Redefining the Regulatory Space?  175 the first time that Ireland has contemplated a shared service hub for non-profit regulatory material. In 2007, significant state and philanthropic funding enabled the development of INKEx,91 an open-source data resource of live regulatory and voluntary disclosures about most of the economically significant non-profits in Ireland. INKEx was intended to provide the backroom support for the new register of charities,92 but the CRA decided to build an independent register in 2014. Renewed departmental and philanthropic funding in late 2014 kept the INKEx project idea alive in the form of Benefacts.93 While Benefacts and the CRA collaborated in mid-2017, with the former maintaining and enhancing the Charities Register, by 2018 the CRA had resumed control of its charities register following an IT revamp and website relaunch. Benefacts continues to provide information on nearly 30,000 non-profits, which includes those bodies on the charities register. Yet, information asymmetries persist, as the CRA has not published the financial information it holds on unincorporated charities (to Benefact’s detriment). Similarly, the CRA itself remains dependent upon CRO records for financial information on incorporated charities (to the CRA’s detriment). For a charity passport scheme to function effectively in Ireland, the CRA would need to have primary control over charity data – a situation that does not currently exist and which will require legislative amendment. In attempting to grapple with the absence of good regulatory control over financial reporting requirements of Irish registered charities, Ireland may be able to learn from England and Wales, where similar problems have been tackled in two ways: assigning primacy for financial reporting standards for incorporated charities to the Charity Commission (CCEW) over Companies House, and developing an incorporated legal form falling outside the scrutiny of Companies House in the form of the ‘charitable incorporated organisation’ (CIO). With regard to the first option, although English law makes Companies House the primary collator of company information, charity law governs the reporting standards associated with charitable company accounts (including the audit requirements). Regulatory focus is thus placed firmly (and correctly) on charity law standards and better enables the CCEW to regulate charities regardless of legal form.94 It is hoped that the forthcoming amendments in the Charities (Amendment) Bill will allow Ireland to emulate this approach.

91 INKEx was the predecessor to a non-profit information management entity known today as Benefacts. See https://en.benefacts.ie/about/governance/. 92 Charities Bill 2007, Dáil Éireann Debate Vol 674 No 2, [452], 11 February 2009. 93 See the written parliamentary responses of the Minister for Public Expenditure and Reform (Deputy Brendan Howlin) to Dáil Questions 294–96 by Stephen Donnelly TD, 3 February 2015. In his response, Minister Howlin commented that his department were ‘engaged in discussions with the Irish Nonprofits and philanthropic organisations on the practicalities and structures involved in re-establishing this project. Any investment will build on the earlier investment and seek to realise the value of the State’s previous funding of this project. This is in keeping with the Government’s aim to develop alternative models of delivery and to provide for greater public accountability and transparency in Government grant-making and its support of the non-profit sector’. 94 English Charities Act 2011, ss 144–147. See also Charities (Annual Return) Regulations 2017.

176  Oonagh B Breen On a related note, the UK’s introduction of the CIO may be worthy of consideration by Irish policymakers. The CIO was specifically designed for charities, allowing them to register just once with the CCEW as an incorporated form of charity which is not a company and does not have to register with or report to Companies House. Designed to offer the benefits of limited liability without the burdens of dual registration and reporting, the first CIOs were introduced in England and Wales in January 2013, with over 13,682 registered by 2018.95 One of the advantages of the CIO is the ease of conversion from an existing unincorporated form (such as a trust or association) to a CIO with all the attendant benefits of limited liability. Since 1 January 2018, it has also been possible for charitable companies and community interest companies (CICs) to gain CIO status in England and Wales.96 Since the CIO reports directly to the CCEW, the CCEW remains the primary regulator and can set the reporting requirements. In 2006, the Irish Law Reform Commission recommended the adoption of a similar CIO form in Ireland,97 a proposal ultimately rejected by the government in its 2007 Charities Bill on the grounds of lack of time to develop the concept.98 Given the five-year delay experienced in the implementation of the Charities Act 2009, lack of political motivation rather than lack of time might better describe the real culprit. While CIOs now account for 16 per cent of all registered charities in Scotland99 and just over 10 per cent of registered charities in England and Wales,100 introduction of an Irish CIO may remain an aspiration for a long time yet to come.

V. Conclusion It is seldom that one finds an area free of regulatory influence and control into which a newly fledged regulator finds itself with a blank slate when it comes to imposing order. Experience reminds us that it is on those occasions when we most

95 Source: Companies Register Activities 2017/18, Companies House. 96 See the Charitable Incorporated Organisations (Conversion) Regulations 2017. Scottish law introduced the SCIO in 2011, two years prior to England and Wales. OSCR indicates that there are approximately 2,788 SCIOs registered in Scotland in 2017. 97 Law Reform Commission, Report on Charitable Trusts and Legal Structures for Charities (LRC 80-2006) available at www.lawreform.ie/_fileupload/Reports/Report%20Charitable%20Trusts.pdf. 98 Department of Community, Rural and Gaeltacht Affairs, ‘Principal Features of the Charities Bill 2007’ (April 2007) (noting that ‘[The CIO] has not been included in the Bill, however, as the underlying purpose of this Bill is to ensure the accountability of the charities sector and to protect against abuse of charitable status and fraud. It is not proposed to delay the regulation of the sector pending consideration of the separate, longer-term question of the CIO issue’. 99 As at 26 April 2019, there were 3,936 SCIOs registered on the Scottish Charity Register out of a total 24,567 registered charities. 100 As at 30 September 2018, out of a total of 168,186 registered charities, there were 17,094 CIOs on the CCEW Register of Charities.

Redefining the Regulatory Space?  177 imagine an area to be a rule-free zone and fertile territory for the i­ mplanting of new regulations that we underestimate the tangled growth of pre-existing r­ egulation.101 The lack of a modern charity law framework for the greater part of 60 years has meant that many fundamental issues relating to definition, oversight and effective management of the charity sector have been overlooked in Ireland from a charity law perspective even as other regulators invade the space to manage their own regulatory concerns. Ignored by charity law but not by other areas of regulation, Irish civic space must now accommodate the establishment of the new charities regulator, the codification of the common law definition of charitable purposes and the setting up of the charities register. These are all important steps towards the creation of a modern regulatory framework for charities in Ireland, but they remain, nonetheless, the first forays of charity law into an already regulated space. Understanding the diverse obligations, responsibilities and motivations of other existing regulators and working closely with them to reduce administrative duplication while adopting a risk-management approach to the regulation of charities – not only in terms of the report filing, but also in terms of the associated regulatory response – will determine how successful the CRA will be in establishing its credentials as an effective regulator in the years ahead. With the receipt of its statutory enforcement powers in 2016, the CRA issued its first interim sanctions order in January 2017,102 prosecuted its first case in February 2017,103 and completed its first statutory investigation in May 2018.104 In setting down these markers, the CRA has clearly signalled its arrival in the regulatory arena, but increased regulatory burden on the sector without a reciprocal good governance gain that can be translated into greater public confidence in charities is unlikely to be welcomed. In the words of Wells, ‘those who seek to regulate charities must walk the fine line … and avoid both damaging interference and damaging neglect’.105 The gauntlet has been thrown down, and it is now for the regulator to prove the value of bespoke charity regulation.

101 The most prevalent examples of such regulatory blindness occur in colonial situations in which native rights and often native title are overlooked in favour of the new ruling class’s preferred regulatory regime. See Tim Halstead, ‘Designing Land Registration Systems for Developing Countries’ (1997–1998) 13 American University International Law Review 647, 657. 102 Charities Regulator Imposes Intermediate Sanctions on Animal Heaven Animal Rescue (AHAR) RCN: 20082383, pursuant to s 73 Charities Act 2009, available at: http://charitiesregulator.ie/en/CRA/ Pages/WP17000001. 103 CRA v Oliver Williams (n 60). 104 CRA statutory investigation of Solas-Galway Picture Palace Teoranta, RCN: 20068493 pursuant to Charities Act 2009, s 64. 105 C Wells, ‘Holding Charities Accountable: Some Thoughts from an Ex-Regulator’ (2006) Boston College Law School Legal Studies Research Paper Series, Research Paper 115.

178

9 Independent Schools in Scotland: Should they be Charities? PATRICK FORD

I. Introduction Scotland’s education system is distinct from the system in England and Wales and falls within the competence of the devolved Scottish institutions.1 For the vast majority of children and young people in Scotland, school education is provided free of charge by the state, at secondary level in comprehensives. In 2015, the Organisation for Economic Co-operation and Development (OECD) delivered a ‘could do better’ verdict on school education in Scotland.2 The Scottish Government responded with a programme of reform incorporating a draft Education (Scotland) Bill intended ‘to play a transformative role in achieving excellence and equity’ in the Scottish education system by addressing the main weaknesses ­identified.3 Against the background of an accepted need to transform the Scottish system for the better, it is not surprising that many families who can afford to do so pay substantial fees to have their children and young people educated in independent schools which operate outside the main framework for state schools. A recent internal report on quality and improvement in Scottish education commented generally favourably on the performance of independent schools.4 Independent schools cater for only a small minority of children and young people in Scotland. In principle, apart from certain special schools, they receive no direct financial support from the state and depend for their funding largely on the fees charged for the educational service they provide, although most mainstream independent schools are charities and benefit in that capacity from the tax reliefs accorded to all charities. The fees charged typically by the mainstream schools are 1 Scotland Act 1998, ss 29(2)(b), 30, sch 5: education is not a reserved matter. 2 OECD, Improving Schools in Scotland: An OECD Perspective (OECD, 2015) 9–12, 19–23. 3 Scottish Government, Draft Education (Scotland) Bill: Draft Policy Memorandum (Scottish Government, 2018) para 3. 4 Education Scotland, Quality and improvement in Scottish education 2012–2016 (Education Scotland, 2017) 32–34.

180  Patrick Ford far beyond the reach of most families in Scotland, and while the schools provide some financial support to enable attendance by children and young people whose families cannot meet their charges, the pupils supported in this way amount to only a small proportion of those who attend independent schools. The net result is that education in independent schools in Scotland is largely the preserve of those whose families can afford to pay substantial fees. Is this fair? An insistent current of opinion in Scotland thinks not. This c­ hapter addresses three main questions in the light of that view. Should independent schools be abolished? If not, should they be excluded from charitable status? If not, should they be allowed the full range of tax reliefs accorded to charities generally? The first of these is a question of educational policy to be answered in accordance with a person’s wider vision of society: an egalitarian will answer it differently from a free-market liberal, and a social democrat will answer it differently again. No answer to that question is offered here – it belongs in a debate on educational policy, not in a debate in charity law – but asking it is an important preliminary to the second question, which is a matter of debate in both educational policy and charity law. At present in Scotland, an independent school may qualify for charitable status and its accompanying tax reliefs if it meets certain ‘public benefit’ requirements. Whether independent schools should continue to be supported indirectly by charity tax reliefs is a matter, ultimately, of educational policy, while the development in detail of those requirements has up to now been a matter of charity law. It is argued here, following an examination of the present system and the possibility of excluding independent schools from charitable status on two alternative approaches – the ‘sink-or-swim’ or ‘education, not charity’ alternatives – that, on balance, if independent schools are not to be abolished, the status quo should be maintained. The third question has been prompted by the ‘Barclay bombshell’. Unexpectedly, in 2017, the Barclay Review of Non-Domestic Rates in Scotland (‘Barclay’) recommended that the existing relief from non-domestic rates accorded to charities should be withdrawn from independent schools, which would otherwise retain their full charitable status and entitlement to other tax reliefs.5 With some nuances, the Scottish Government has accepted that recommendation, which is to be implemented by a Bill currently before the Scottish Parliament.6 The third question has therefore been answered in Scotland in the negative – independent schools are not to be allowed the full range of tax reliefs accorded to charities generally. It is suggested here that, while it might have been preferable to maintain this aspect of the status quo along with the rest, if the existing 80 per cent mandatory relief is to be withdrawn, a case can be made for leaving local authorities with full discretionary power to remit the rates of independent schools up to 100 per cent.7 5 Kenneth Barclay, Barclay Review of Non-Domestic Rates in Scotland (Scottish Government, 2017) para 4.120. 6 SP Bill 44 Non-Domestic Rates (Scotland) Bill Session 5 (2019), s 10 [amending Local Government (Financial Provisions, etc) (Scotland) Act 1962, s 4]. 7 See LG(FP)(S)A 1962, s 4(5).

Independent Schools in Scotland: Should they be Charities?  181 The chapter concentrates on Scotland, but its three main questions have resonances in a long-standing debate in England and Wales on the charitable status of independent schools. A tentative contribution to that debate from Scotland is offered in the conclusion to the chapter, with due deference to the larger jurisdiction and its more complex and mature charity law.

II.  Scottish Independent Schools in Context The main system of state schools in Scotland provides for some 690,000 pupils in approximately 2,500 schools.8 Scottish local authorities have direct responsibility for all state schools in their area, within a legislative and policy framework overseen by the Scottish Government, and subject to curriculum and inspection regimes administered by its agency, Education Scotland.9 The comprehensives system was introduced in 1965, replacing a system of senior and junior secondary schools in which the senior secondaries served pupils selected at 12 as academically suitable for university entrance. Selection ended, and after some transitional resistance, comprehensive schooling at secondary level came to be embraced as the appropriate norm for a democratic Scotland.10 While the main state system is homogenous at secondary level in that all schools are comprehensives, it is accepted that there are significant variations of quality across the system, and the broad aim of the ongoing reform prompted by the OECD report is ‘to close the unacceptable gap in attainment between [the] least and most disadvantaged children and to raise attainment for all’.11 The key theme of the reform is ‘empowering schools’ – empowering them, that is, by increasing their autonomy and emancipating them to a degree from local authority oversight, principally by strengthening the decision-making powers of individual head teachers and enhancing the mainly consultative role of the existing parent councils.12 Regional Improvement Collaboratives are being established in response to ‘the need to strengthen and support educational leadership and to ensure that mutual support and learning across educational authorities and networks of schools is provided’.13 8 Scottish Government, Summary Statistics for Schools in Scotland 2018 (Scottish Government, 2018). 9 OECD, Improving Schools (n 2) 35–39. For the legislative framework, see www.education.gov.scot (‘Legislation’). 10 D Murphy et al (eds), Everyone’s Future: Lessons from Fifty Years of Scottish Comprehensive Schooling (London, Institute of Education Press, 2015) chs 1 and 2. 11 Scottish Government, Empowering Schools: A Consultation on the Provisions of the Education (Scotland) Bill (Scottish Government, 2017) 1. 12 Scottish Government, Draft Policy Memorandum (n 3) paras 3, 4, 25–28, 31. The aims of the Draft Bill are currently being pursued under an agreement with local authorities which may obviate the need for legislation: Scottish Government, Education Reform – Joint Agreement (Scottish Government, 2018). 13 Scottish Government, Draft Policy Memorandum (n 3) para 29.

182  Patrick Ford There are some 90 independent schools in Scotland, of which around a third are specialist providers of additional support needs education.14 Of the 60 or so mainstream independent schools, almost all are charities and members of the Scottish Council of Independent Schools (SCIS),15 these schools making up what is normally thought of as the independent schools sector in Scotland. In round figures, they serve some 30,000 pupils, or 4.1 per cent of pupils educated in Scotland, mostly in day schools, but the SCIS membership includes 19 mainstream boarding schools, serving some 2,750 boarders, 35 per cent of whom are from overseas.16 Two thirds of the pupils who attend independent schools in Scotland do so in Glasgow, Edinburgh or Aberdeen, and more than a quarter of secondary pupils in Edinburgh attend independent schools.17 Some of the largest independent day providers are long-established endowment and ‘proprietary’ schools, either founded or adapted from earlier institutions to meet the educational needs of the burgeoning middle class of nineteenth century Scotland.18 In the pre-comprehensives era, many came to be part-funded by direct grants from the state as academic equivalents of the senior state secondaries, and after 1965 had the opportunity to opt into the main state system as comprehensives. Some of the most prominent, however, chose not to, preferring to retain control of their academic ethos as independently-funded schools.19 Independent schools are independent of local authority control but not wholly independent of the state: a system of compulsory registration and light-touch regulation integrates them into the overall framework of educational provision in Scotland.20 Registration entails periodic inspections by Education Scotland, but independent schools are largely autonomous academically and operationally and are free, in particular, to select by academic aptitude. The schools are not subject to the ongoing reform of the main state sector. The state guarantee of minimum standards through registration may be seen as underpinning the effects of the market: families will only pay substantial fees to a mainstream independent school if they perceive the educational provision being offered to be of a markedly higher standard than that available free of charge in the main state system. Fees are the life-blood of the independent sector. Charity tax reliefs apart, the direct funding for the larger schools comes generally from a combination of fees, investment income, donations and legacies, but the cost of delivering modern education is such that even schools supported by originally generous ­endowments 14 Scottish Government, Registered Independent Schools in Scotland: June 2019 (Scottish ­Government, 2019) www.gov.scot/publications/independent-schools-in-scotland-register/. 15 See Scottish Charity Register (www.oscr.org.uk) and SCIS (www.scis.org.uk). 16 SCIS, Annual Census 2018 (www.scis.org.uk/facts-and-figures). 17 OECD, Improving Schools (n 2) 36. The figures are for 2013/14. 18 R Anderson, Scottish Education since the Reformation (Economic and Social History Society of Scotland, 1997) 34, 35. See, eg, Edinburgh Academy, founded by subscription in 1824; and George Heriot’s School, founded in the 17th century as a ‘hospital’ for ‘puire, fatherless bairnes’. 19 Murphy, Everyone’s Future (n 10) 5, 6. 20 See Education (Scotland) Act 1980, pt V and associated regulations; also Scottish Government, The Registration of Independent Schools in Scotland: Guidance Notes (Scottish Government, 2014, 2015).

Independent Schools in Scotland: Should they be Charities?  183 inevitably rely on fees as their main source of income.21 Boarding fees for a senior pupil can exceed £40,000 for a school year;22 an endowment day school in Glasgow quotes over £12,500 a year for a senior pupil, and a ‘proprietary’ ­equivalent in Edinburgh over £14,500.23 There is little doubt, therefore, that, but for facilitated access, the education offered by a mainstream independent school is far beyond the reach of the average Scottish household.24

III.  Should Independent Schools be Abolished in Scotland? This is a question to be answered as a matter of educational policy, not charity law, but the general arguments offered on either side, in Scotland as in England and Wales, provide the backdrop for the main question for the chapter: whether independent schools should be excluded from charitable status. At the risk of oversimplification, the arguments for abolition can be characterised as egalitarian, as championed by official Labour party policy before the advent of New Labour and again finding favour in today’s party.25 On the other side, the traditional ‘freedom of choice’ argument against abolition can be characterised as representative of the free-market liberalism of Margaret Thatcher’s Conservatives.26 The policy behind the status quo in Scotland – independent schools are not only tolerated but eligible for charitable status, which can be used to oblige them to reach out beyond their immediate fee-paying beneficiaries – may be traced to a social democratic strand in the educational ideology of Labour under Tony Blair: the merits of free choice and economic liberalism are acknowledged but their adverse social consequences are to be mitigated by state intervention.27 For abolition, it is said that independent schools are socially divisive. No doubt the main target for this charge in the context of educational provision 21 See, eg, Governors of the Fettes Trust, Report and Financial Statements 2017–18 (www.fettes.com). 22 Eg, Gordonstoun (www.gordonstoun.org.uk). 23 Hutchesons’ Grammar School (www.hutchesons.org); Edinburgh Academy (www.edinburghacademy.org.uk). 24 Research commissioned by OSCR in 2008 found that ‘charges of up to £1,500 annually do not appear to significantly impact on the ability to pay for the vast majority of Scottish families (with income above income support)’: Statement on use of ability to pay research and model (OSCR, 2009) para 12.1. 25 See D Morris, Schools: An Education in Charity Law (Aldershot, Dartmouth Publishing, 1996) 24–29; and, generally, F Green and D Kynaston, Engines of Privilege: Britain’s Private School Problem (London, Bloomsbury, 2019) for a forceful restatement of the arguments. The Labour Conference 2019 resolved to ‘integrate all private schools into the state sector’ progressively by withdrawing tax reliefs, removing charitable status and, ultimately, redistributing their assets ‘democratically and fairly across the country’s educational institutions’: The Financial Times, London, 22 September 2019. 26 Green and Kynaston, Engines of Privilege 195. 27 A Dunn, ‘Using the Wrong Policy Tools: Education, Charity and Public Benefit’ (2012) 39 Journal of Law and Society 491–514, 496; L Paterson, ‘The Three Educational Ideologies of the British Labour Party, 1997–2001’ (2003) 29 Oxford Review of Education 165–186, 166.

184  Patrick Ford for the UK as a whole is the long-established sub-system of ‘public schools’, in reality expensive private boarding schools serving principally a constituency of ­well-off fee-payers from across the country, rather than their local communities. On an egalitarian view, these schools are breeding grounds for a self-perpetuating elite with privileged access to the best universities and jobs. While most of ­Scotland’s mainstream independent schools are day schools with strong links to their localities, and few of the boarding schools fit the stereotype of the English public school,28 a less stark social division can be identified between the pupils and alumni of the large independent day schools and the pupils and alumni of the modern Scottish comprehensive. Schools from either side of the divide which previously had much in common – the endowment and proprietary schools and the senior state secondary schools were once recognisably equivalents29 – have grown apart since the advent of comprehensive schooling: socially, by virtue of the ever higher fees charged by independent schools, and educationally, not only in the type of education offered but also, if the OECD’s criticisms are accurate, in the higher quality of education available in the independent sector, at least across the board.30 Again, the concern of the egalitarian is that a privileged middle class becomes self-perpetuating through its fee-charging schools and that others are shut out from the opportunities they offer; independent schools are out of kilter with the aspirations for a classless society represented by the comprehensives and should be got rid of. For abolition, it is also said that independent schools undermine the main state system by siphoning off talented pupils and staff who might otherwise contribute to higher standards.31 So, too, the perceived need to boost the effectiveness of parent councils in the current reform suggests that the state schools may be the weaker for the loss of input from motivated middle-class parents whose engagement with their children’s education is evidenced by their willingness as well as ability to pay fees. Against abolition, the free-market liberal would counter with the principle of choice: families who can afford to pay for what they see as a superior education for their children, in many cases at the cost of considerable sacrifice in other areas of family expenditure, should be free to do so. More pragmatically, it may be argued that the independent sector makes an important contribution to Scotland’s educational provision overall, which the main state system would be hard pressed to replicate, in terms of both funding and quality of provision, if the sector were abolished.32 In the same vein, it may be said that the sector makes an important 28 Of the 19 SCIS schools designated as boarding schools, 12 serve more day pupils than boarders (www.scis.org.uk). 29 Anderson (n 18) 51. 30 OECD, Improving Schools (n 2) 10–12. 31 Ability-related scholarships and teacher-pupil ratios may be cited. SCIS member schools serve 4.1 per cent of pupils in Scotland but employ 6.6 per cent of teachers: SCIS, Annual Census 2018 (n 16). 32 See Biggar Economics, Economic Impact of Scottish Independent Schools: A report to SCIS (SCIS, 2016) 7.1.

Independent Schools in Scotland: Should they be Charities?  185 indirect contribution to the Scottish economy beyond its direct contribution to education, much of which would be lost, the argument goes, if the i­ndependent sector, funded as it is principally by private money, some of it from outside Scotland, were abolished by full absorption into the state-funded system.33 Whatever the merits of the competing arguments, representative as they are of competing visions of society, there is limited momentum at present for the abolition of independent schools in Scotland and the focus of debate is firmly on their charitable status.34 While not articulated in any formal policy document, the attitude of the Scottish Government could until recently be taken as one of tacit acknowledgement of the positive contribution of independent schools to the provision of school education in Scotland and acquiescence in the status quo: the system of registration and light-touch regulation has been kept up to date,35 and calls for removal of charitable status have been quietly resisted.36 After all, most independent schools already possess the main characteristics which state schools are being encouraged to adopt under the current reform: operational autonomy, in the sense in particular of emancipation from local authority control, strong headteacher leadership and committed input from parents. The Scottish Government has plenty on its hands already with its reform of the main state system, and a pragmatic approach to the independent sector must have obvious attractions: independent schools are generally good schools and Scotland needs good schools, so why not leave them alone to get on with what they do well? For an administration juggling with funding priorities, it is no small consideration that they require no direct funding from the state. But this pragmatism has a social democratic dimension: independent schools are allowed to flourish, funded by high fees, but required to mitigate the resulting exclusiveness by public benefit commitments enforced through the charities system.

IV.  Scottish Independent Schools as Charities Charitable status in Scotland, a devolved matter, entails compliance with a regulatory regime provided for by the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act), overseen by the Scottish Charity Regulator (OSCR).37

33 Ibid, generally, including 7.5 on ‘Exports’. 34 Paul Sweeney MP, shadow Scotland Office minister, recently suggested that ‘all private schools should be brought, en masse, into the state sector’: J Boothman, ‘Labour targets Scotland’s “elitist” private schools’ The Sunday Times (London, 16 June 2019). The remark anticipates the Labour Conference resolution of September 2019 (see n 25). Scottish Labour is not the force it once was and its prospects of implementing such a policy at devolved level must be in doubt. 35 Eg, by the Registration of Independent Schools (Prescribed Person) (Scotland) Regulations 2017. 36 As at 8 February 2017, the Scottish Government did ‘not have any plans to review the charitable status of independent schools’: answer to Written SP Question S5W-06644. 37 Scotland Act 1998, ss 29(2)(b), 30, sch 5, Pt II, C 1; Charities and Trustee Investment (Scotland) Act 2005 (2005 Act), s 1. OSCR oversees some 24,500 charities: www.oscr.org.uk.

186  Patrick Ford A body becomes a charity by registration in the Scottish Charity Register and on applying for registration must meet a statutory ‘charity test’ which forms part of the regime.38 A body which is already registered must meet the charity test on an ongoing basis and is liable to periodic review.39 Most of the independent schools currently entered in the register were transferred under transitional provisions from an index of ‘Scottish charities’ maintained by HMRC under the previous regime for the regulation of charities in Scotland, having been admitted to the index as bodies entitled to charity tax relief under the prevailing fiscal legislation by virtue of their ‘charitable purposes’ in the meaning of the term in the law of England and Wales.40 Following transfer, the schools were the subject of a systematic review of their conformity with the charity test.

A.  Policy Background to Review of Fee-Charging Schools The policy background to the schools review is best understood in the light of an attempt by Tony Blair’s Labour Government to harness charitable status in England and Wales as a tool of social democratic intervention in the world of independent schools. Labour had moved away from its earlier policy of abolition, failing which exclusion from charitable status, in favour of pushing fee-charging schools towards widened access for those unable to pay and operational partnerships with schools in the state sector.41 Hopes were placed in an adjustment in the Charities Act 2006 of the public benefit component of the definition of ‘charitable purpose’ in English law. It had been an apparent feature of the relevant case law that certain purposes, including those for the advancement of education, were presumed to be for the public benefit. The 2006 Act provided for removal of the presumption, but otherwise left the public benefit requirement to be governed by the cases.42 There was initial uncertainty over the effect of this change, but the interventionist view was that charities thought to have sheltered under the presumption, such as independent schools, would have their public benefit credentials scrutinised as never before.43 The Charity Commission went so far as to issue guidance suggesting that it could subject a charity’s fees to a reasonableness test, to ensure that access to benefit was not unreasonably restricted by a person’s ability to pay, and setting out various ways of meeting the test which chimed with the ­underlying social democratic objectives for independent schools.44 When the guidance was 38 2005 Act, ss 3–9. A ‘body’ may be constituted in a variety of legal forms: s 106. 39 2005 Act, s 3(6). 40 2005 Act, s 99; Law Reform (Miscellaneous Provisions) (Scotland) Act 1990, pt I (repealed in part); Income and Corporation Taxes Act 1998, s 505 (repealed). 41 See n 25 and Dunn (n 27) 500 ff. 42 Charities Act 2006 Act, ss 2, 3; see now Charities Act 2011, ss 2, 4. 43 Dunn (n 27) 502; J Warburton, ‘Charities and public benefit – from confusion to light?’ (2008) 10 Charity Law and Practice Review 1–25, 13–20. 44 Charity Commission, Charities and Public Benefit (Charity Commission, 2008); Public Benefit and Fee-charging (Charity Commission, 2008) C.

Independent Schools in Scotland: Should they be Charities?  187 judicially examined on the initiative of the Independent Schools Council (ISC) (the ISC case), it was held, in effect, that the apparent presumption of public benefit was illusory, so that its supposed removal had no impact on the substance of the case law, and that the cases provided no warrant for the Charity Commission’s reasonableness test.45 A school providing mainstream education could meet the public benefit requirement even if those who benefited from the provision were largely from families who could afford to pay substantial fees so long as the ‘poor’ were not entirely excluded.46 Provision for the ‘poor’ as beneficiaries must go ‘beyond the de minimis or token’, but satisfaction of the public benefit requirement was otherwise a matter for the discretion of charity trustees.47 Before its emasculation in the ISC case, the English initiative had had an indirect influence in Scotland. Although not fully articulated, the social democratic purpose underlay assurances given by the then Scottish Executive, a Labour-Liberal Democrat coalition, during parliamentary consideration of the charity test: ‘The Bill guarantees an objective test. The aim is not to attack independent schools – some of them will be in and some of them will be out’;48 and more generally: ‘[C]harging a fee so that access is granted will not automatically prevent bodies from being deemed as charities’.49 In principle, therefore, independent schools would still be able to charge fees and enjoy charitable status as under the previous law, but more would be demanded of them under the new charity test. The working out of the test was left largely to OSCR, which in the event developed an approach to fee-charging very similar to the one the Charity Commission was forced to abandon by the ISC case. This is not surprising: the two regulators were committed to finding a common position on public benefit ‘wherever possible’, despite the differences between the Scottish charity test and English charity law.50

B.  Advantages of Charitable Status in Scotland In Scotland, charitable status and its advantages – the quid pro quo for the provision of public benefit – flow from registration in the Scottish Charity Register. For independent schools, the key advantages at Scottish level are entitlement to 45 R (Independent Schools Council) v Charity Commission [2011] UKUT 421 (TCC). See Dunn (n 27) 504–505; also M Synge, The ‘New’ Public Benefit Requirement: Making Sense of Charity Law? (Oxford, Hart Publishing, 2015) ch 8. 46 The ISC case (n 45) paras 177, 178. ‘Poor’ does not necessarily mean destitute: persons of ‘modest means’ or ‘not very well off ’ may count as ‘poor’ in appropriate circumstances: para 179. 47 Ibid paras 215–218. The 2008 guidance was withdrawn and replaced: see especially Charity Commission, Public benefit: running a charity (Charity Commission, 2013) Annex C. 48 Deputy Minister for Communities, Communities Committee OR (20 April 2005) col 2083. 49 Deputy Minister for Communities, Scottish Parliament OR (9 June 2005) col 17853. 50 OSCR/Charity Commission, Memorandum of Understanding between OSCR and the Charity Commission (OSCR, 2007) annex 3, para 2. The influence appears to have been mutual: while the underlying policy originated in England and Wales, the Charity Commission’s 2008 guidance may have drawn on OSCR’s ‘pilot’ application of the charity test to Dundee High School (see n 63 below): Synge, The ‘New’ Public Benefit Requirement (n 45) 180.

188  Patrick Ford use the charity ‘brand’,51 relief from non-domestic rates,52 and relief from Scottish land and buildings transaction tax (LBTT).53 At UK level, registration with OSCR puts beyond doubt satisfaction of the ‘registration condition’, one of a cluster of conditions of eligibility for UK charity tax reliefs provided for by the Finance Act 2010, of which another is the requirement that a claimant is established for ‘charitable purposes’ only in the sense of the term in the law of England and Wales.54 A school which has met the Scottish test will almost certainly also meet the English charitable purposes test, which, as understood in the light of the ISC case, is, on the determinative issue of fee-charging, less stringent. It may be noted, however, that in certain circumstances the registration condition may also be met by a body established in Scotland which is not registered with OSCR.55 It is the tax reliefs which make the charitable status of independent schools controversial. As things stand, schools registered with OSCR are entitled to mandatory relief to the extent of 80 per cent from non-domestic rates, with discretion to the local authority to grant further relief up to 100 per cent, reliefs which are significant on an annual basis both for individual schools in savings and for local authorities in rates lost.56 The value of the other reliefs is harder to estimate, since relief from LBTT at Scottish level is a function of transactional activity which varies from school to school and from year to year, and calculating the total tax saved or lost at UK level is complex because of the range of taxes involved, their differing impacts on individual schools, and the absence of sufficiently detailed statistics.57 Nonetheless, a school’s entitlement to reclaim tax on donations under the Gift Aid scheme may be highlighted as likely to be significant for most schools;58 so also, it would be a significant blow for most schools if Value Added Tax were to be charged on school fees.59 Just as a body becomes a charity by being entered in the Scottish Charity Register, it ceases to be a charity on being removed from the register, whether at its

51 In principle, only bodies entered in the register may call themselves charities in Scotland: 2005 Act, ss 13, 14. 52 Local Government (Financial Provisions etc) (Scotland) Act 1962, s 4(2), (5), (10). 53 Land and Buildings Transaction Tax (Scotland) Act 2013, s 27(1), sch 13, paras 1, 15(1)(a). 54 Finance Act 2010, s 30, sch 6, paras 1(1), (4), 3(1), (3); Charities Act 2011, ss 2, 7. 55 The registration condition demands that a claimant comply with ‘any requirement’ to register (FA 2010, sch 6, para 3(1), (3)), but in Scotland a body is free to pursue charitable purposes without being registered so long as it does not call itself a charity: 2005 Act, ss 13, 14. 56 See n 52. The direct cost to mainstream independent schools of removal of charity rates relief is estimated at £7 million for 2020–21: Non-Domestic Rates (Scotland) Bill Financial Memorandum (SP Bill 44-FM, Session 5, 2019) paras 34–39, Table 1. 57 See Charitable Status and Independent Schools (House of Commons Library Briefing Paper No 05222, 19 September 2017) para 1.4; and, generally, UK Charity Tax Reliefs Statistics 1990–91 to 2017–18 (HMRC, 2018). 58 Gift Aid paid to all charities registered in Scotland (of which some may also be registered in England and Wales or Northern Ireland) amounted to £80 million in 2018: response to Written PQ, Commons 216364 (4 February 2019). 59 As proposed in For the Many, Not the Few: The Labour Party Manifesto 2017, 38. The measure is now one of a more radical set of proposals: see n 25.

Independent Schools in Scotland: Should they be Charities?  189 own request or if it fails the charity test on a review by OSCR.60 On removal, the body loses the advantages of charitable status but remains under a duty to apply its pre-removal assets, and any income arising, in accordance with its purposes as they stood immediately before removal; and the de-registered body, though no longer a charity, must continue to submit annual accounts to OSCR in respect of its pre-removal assets, and remains subject to a residual regime of enforcement by OSCR and the Court of Session.61 This ‘asset lock’ protects past donors to the body, but operates, in combination with loss of the advantages of charitable status, as a significant disincentive to voluntary removal from the register and, by the same token, as a significant incentive to taking any steps identified by OSCR, on a review, as necessary for a body to meet the charity test and remain in the register. As a mechanism for social democratic intervention, therefore, charitable status in Scotland can be seen to operate by carrot and stick. The advantages of charitable status are the carrot, the reward for provision of public benefit in forms acceptable to the state; the stick is removal from the register if, on a review, the charity’s public benefit offering is found to fall short of the mark.

C.  The Charity Test as Applied to Independent Schools Independent schools were identified early on as one group of charities transferred from HMRC’s index with a ‘high likelihood’ of failing the charity test on review because of the restrictive effect of high fees on access to benefit.62 A review of all 52 of the schools transferred was undertaken over a period of seven years. Forty of the schools met the charity test on first assessment; 10 failed it initially but were given an opportunity to take remedial steps to enable them to meet the test and did so, all being found to satisfy the test on reassessment; of these, nine were required to adjust their fee-charging practices; the reviews of the remaining two schools were suspended for reasons unconnected with the test.63 The 2005 Act provides that a body meets the charity test if (a) its purposes consist only of one or more of 16 specified charitable purposes, which include

60 2005 Act, ss 18, 30. 61 2005 Act, s 19. In Scotland there is no equivalent of the English rule against the validity of noncharitable purpose trusts: where the body of trustees of a Scottish public trust (a trust benefiting the public or a section of the public) is de-registered, the trust will continue in existence under the general law of trusts. 62 OSCR, Fee-charging schools, public benefit and charitable status (OSCR, 2014) para 4. The schools review was originally part of a planned ‘Rolling Review’ of all charities in the register, subsequently abandoned in favour of a risk-based system of ‘targeted regulation’: see OSCR, Protecting charitable status: A report on individual charity reviews 2006–11 (OSCR, 2012) 46. 63 Fee-charging schools (n 62) para 1 and app listing the schools reviewed. For review reports on individual schools, see OSCR, Rolling Review: Pilot Study Report (OSCR, 2007) paras 5.6–5.6.4 and apps (‘pilot’ review of Dundee High School); Rolling Review – Phase 1a: OSCR decisions on 30 charities (OSCR, 2008); Protecting charitable status (n 62); and (for most reports) Charitable status reviews – schools (www.oscr.org.uk). See Synge (n 45) 173–180 for a full analysis.

190  Patrick Ford the advancement of education, and (b) it provides (or, in the case of an applicant for registration, provides or intends to provide) public benefit in Scotland or elsewhere.64 It is for OSCR to decide whether a body provides public benefit, subject to directions requiring it to have regard (inter alia) to: (a) how any … disbenefit incurred or likely to be incurred by the public … in consequence of the body exercising its functions compares with the benefit gained or likely to be gained by the public in that consequence, and (b) where benefit is, or is likely to be, provided to a section of the public only, whether any condition on obtaining that benefit (including any charge or fee) is unduly restrictive.65 The charity test was derived from the definition of charity for England and Wales but has some distinctive characteristics.66 First, there is no requirement to read the statutory provisions in the light of the extensive case law on the English definition: the public benefit component of the charity test is intended to ‘encapsulate’ the relevant case law, but there is no requirement for OSCR to look beyond the bare terms of the statute.67 Secondly, OSCR’s assessment of whether a body provides public benefit is an activities test: OSCR must check that the purposes in the body’s constitution are all charitable, and that its activities are consistent with its purposes, but the question of whether the body provides public benefit is to be assessed on the basis of what it does, including what fees it charges, as matters of fact.68 Thirdly, the charity test is ‘holistic’: OSCR’s task is an assessment of the body’s activities taken as a whole, not an analysis of whether each of its individual purposes, if more than one, is for the public benefit.69 Fourthly, the charity test authorises OSCR to submit a charity’s fees to a reasonableness test.70 But for the issue of fee-charging, application of the charity test to a mainstream independent school is comparatively straightforward: a school’s main purpose or purposes will inevitably fall within ‘the advancement of education’, and the main benefit it provides will be a ‘school education’ – a ‘progressive education

64 2005 Act, s 7(1). The charitable purposes, set out in s 7(2), are in effect ‘descriptions of purposes’: cf Charities Act 2011, s 3. Further provisions secure the non-profit and non-party political character of charities and their independence from central government: 2005 Act, s 7(4). 65 2005 Act, s 8(2). 66 For an English perspective on the test, see Synge (n 45) ch 7. See also S Cross and P Ford, Greens Annotated Acts: Charities and Trustee Investment (Scotland) Act 2005, 2nd edn (London, W Green, 2017) paras 8.03–8.06, 9.03–9.26. 67 Minister for Communities, Scottish Parliament OR (9 March 2005) col 15097; cf Charities Act 2011, ss 3(3), 4. 2005 Act, s 8(1) provides that no particular purpose is to be presumed to be for the public benefit, echoing removal of the supposed presumption in England and Wales but with even less significance in Scotland because the English public benefit cases form no part of the charity test: cf Charities Act 2011, s 4(3). 68 OSCR, Meeting the Charity Test: Guidance for applicants and existing charities (OSCR, 2015) 7. Cf the ISC case (n 45) paras 73, 188–191. 69 OSCR, Pilot Study (n 63) 86 (app 4, Conclusion); cf Charities Act 2011, ss 1(1)(a), 2(1)(b). 70 2005 Act, s 8(2)(b).

Independent Schools in Scotland: Should they be Charities?  191 appropriate to the requirements of pupils, regard being had to the[ir] age, ability and aptitude’71 – but a school’s contributions to the wider community will also count as positives in OSCR’s holistic assessment of public benefit. On the other hand, in its weighing of disbenefit incurred against benefit gained, OSCR disregards any detrimental impact independent schools may be said to have on the state schools in their area or on society in general, whether by undermining standards or entrenching social divisions, on the basis that any negative effects are insufficiently supported by evidence, and that such considerations belong in any case to a general critique of the independent schools sector rather than the assessment of a particular school.72

D.  Fees as Restrictive Conditions The direction in the 2005 Act on restrictive conditions comes into play in the case of a mainstream independent school because its main benefit, a school education, is provided to a section of the public only – children and young people of school age. OSCR must therefore have regard to whether any condition on obtaining the benefit, including any charge or fee, is ‘unduly restrictive’. OSCR’s gloss on the statutory formula is that an unduly restrictive condition is a limit – whether arising from a body’s constitution or de facto – ‘on who can access the benefit provided by an organisation where the restriction is not reasonable or justifiable in the context of what the organisation does and what its purposes are, or is unlawful’.73 The direction on restrictive conditions, in other words, is a reasonableness test. Surprisingly, perhaps, none of the schools assessed was found to have unduly restrictive policies on admission to benefit by academic aptitude and ability. OSCR’s view is that academic selection can be justified if its purpose is no more than to select out those who ‘would have particular difficulty in coping with the type of education provided’,74 or, more positively, to ensure that those admitted would ‘benefit from the wide range of opportunities offered to them’.75 These are notably milder forms of selection than the strict academic selection at 12 applied in both state and independent sectors in the pre-comprehensives era. The charging of fees, on the other hand, generally at a level well beyond the spending-power of most Scottish households, is clearly a limit on who can access the benefit provided by a mainstream independent school which requires robust justification if it is not to be considered unreasonable.76 It would have been within 71 Education (Scotland) Act 1980, s 1(5), as adopted in OSCR, Pilot Study (n 63) para 5.6.1. 72 OSCR, Pilot Study (n 63) para 5.6.3; cf the ISC case (n 45) paras 96, 97, 108, 109. 73 OSCR, Meeting the Charity Test (n 68) 88. 74 OSCR, Pilot Study (n 63) para 5.6.3. 75 OSCR, ‘The Governors of the Fettes Trust. Scottish Charity Number: SC017489. Inquiry Report under section 33 of the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act)’ (www. oscr.org.uk/media/1498/inquiry-report-the-governors-of-the-the-fettes-trust.pdf, 2013) 5. 76 See n 24.

192  Patrick Ford the scope of OSCR’s discretion simply to say that a school’s fees are unduly restrictive and unreasonable if, as a matter of fact, they shut out from benefit a clear majority of the school’s theoretical beneficiary class, and that is no doubt what was hoped for by those who pressed for express reference to charges and fees in the charity test.77 That would have excluded almost all mainstream independent schools from charitable status.78 But it was also within OSCR’s discretion to proceed as it did, broadly in line with ministerial expectations. OSCR underpinned its approach with a set of principles on fee-charging for charities generally which still form part of its guidance on meeting the charity test.79 Although under no obligation to take account of the law on public benefit in England and Wales, OSCR clearly took as the starting point for its five principles the traditionally permissive approach to fees of the English case law,80 while at the same time exploiting the potential for social democratic intervention inherent in the statutory reasonableness test. OSCR couches its five general principles as ‘What we look at when we consider fees and charges’: (1) help for those who cannot pay; (2) the full scope of the benefit provided; (3) proportionality; (4) transparency; (5) the cost of providing benefit is relevant. Crucially for independent schools, OSCR recognises under the fifth principle that charities must be able to cover the cost of providing benefit, including provision for future sustainability, even where the cost is high.81 The social democratic trade-off is that where the fees charged affect access to benefit, OSCR expects the restrictive impact to be mitigated – in the case of an independent school by a combination (under the first and second principles) of facilitated access to the school’s main benefit, its school education, and access at no cost or minimal charge to other benefits provided by way of wider community engagement, in particular with the wider educational community.82 Facilitated access – help for those who cannot pay such as bursaries and discounts – should make ‘provision for people with a wide range of incomes including low incomes’, and ‘forms of facilitated access which are clearly linked to the financial situation of potential beneficiaries (for instance through meanstesting)’ – as opposed, for instance, to scholarships tied to academic merit – ‘are likely to have the greatest impact’ in mitigating the restrictive effect of substantial fees.83 Support for payment of fees may come from the school itself, funded by 77 Scottish Parliament OR (9 June 2005) Col 17852. 78 Cf OSCR’s treatment of ALEOs: Cross and Ford (n 66) paras 9.25, 9.26. 79 See OSCR, Pilot Study (n 63) app 4 and (now) Meeting the Charity Test (n 68) 90. 80 See especially Re Resch’s Will Trusts [1969] 1 AC 514, as interpreted in Charity Commission, Public Benefit – the Legal Principles (Charity Commission, 2005) A21–A24. 81 Meeting the Charity Test (n 68) 90. For application of the five principles in practice see, eg, the Fettes Trust report (n 75). 82 OSCR, Fee-charging schools (n 62) paras 5, 10. 83 See the Fettes Trust report (n 75) 8. The school revised its facilitated access provision on initially failing the charity test, increasing means-tested awards (representing 8.4% of the school’s available income) to 10.6% of the school roll; within the 10.6%, 3.7% of the roll received awards in the range 81–99% of fees, and 0.8% 100% remission; together with a range of community engagement activities offered at no or nominal charge, the revised provision enabled the school to meet the charity test on re-assessment. See also Fee-charging schools (n 62) para 10.

Independent Schools in Scotland: Should they be Charities?  193 its own fee and other income, from separate but associated endowment funds, or from third party sources unconnected with the school.84 The proportionality principle requires that the more substantial the fees, the more should be put in place by way of facilitated access to the main benefit or access to other benefits provided at no or minimal charge. The transparency principle demands that arrangements for facilitated access be properly publicised to those who may be eligible to take advantage of them. The holistic nature of the charity test enables OSCR to take account of the ‘full scope’ of the benefits provided by a school free or for a nominal charge in mitigation of the restrictive effect of fees on access to its main benefit. As well as allowing ‘regular and scheduled use of … sports facilities and school grounds by local state primary schools’,85 providing free use of minibuses for local state schools,86 contributing to the development of the Curriculum for Excellence (the standard curriculum for state schools), hosting student and probationary teachers from the state system as part of their training and professional development, and supporting the national examinations system by providing markers, moderators and other examining officials87 – all of which may be seen as forms of engagement with the wider educational community – a school may engage constructively with the wider general community, for example by hosting a regional charity tennis tournament or making an indoor golf centre available to ‘the Scottish Golf Union for the development of golf in Scotland and … to the local community to promote golf to all ages’.88 OSCR makes it clear that in decisions on restrictions on access, as on the assessment of public benefit generally, each case is to be considered on its own merits and that there are ‘no absolute requirements, ratios or thresholds’.89 ‘[I]t is for the charity to decide in what way it can best ensure that any fees or charges do not unduly restrict access to its benefits, but the overall decision on whether there is public benefit is for OSCR to make’.90 The review reports on individual schools should, therefore, be regarded as no more than illustrative of OSCR’s general approach to fee-charging, but there is no doubt that taken together they provide a clear working indication of what is expected – indeed required – of the independent schools sector in Scotland in return for the advantages of charitable status.91

84 Pilot Study (n 63) para 5.6.2. 85 See the Fettes Trust report (n 75) 12. 86 OSCR, ‘Loretto School Ltd. Scottish Charity Number: SC013978. Inquiry Report under section 33 of the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act)’ (www.oscr.org.uk/ media/1616/2014-06-19_-_updated_s33_report_loretto.pdf, 2014) 12. 87 Pilot Study (n 63) para 5.6.2. 88 See the Loretto report (n 86) 12, 13: benefit generated under ‘the advancement of citizenship or community development’ (2005 Act, s 7(2)(f)) may mitigate restricted access to benefit under ‘the advancement of education’. 89 Fee-charging schools (n 62) para 5. 90 See the Fettes Trust report (n 75) 7. 91 Cf England and Wales: Synge (n 45) 180.

194  Patrick Ford OSCR’s schools review can be seen to have had some success in meeting its implicit social democratic objectives. It has demonstrably raised the levels of facilitated access and wider community engagement in the case of at least nine of the 52 schools reviewed, with the probability that others raised their game in anticipation of assessment. While fee-mitigation measures are in detail a matter for the discretion of schools themselves, the ‘stick’ of removal from the register means that in practice OSCR can impose a remedial plan of steps required to meet the charity test on reassessment.92 OSCR intends for the future to maintain a ‘higher level of vigilance’ over the schools in its register than over charities generally, to guard against ‘backsliding’ from the requirements set by the review,93 but it would be difficult now for OSCR, having completed the review, to revisit the requirements and revise them upwards. As an instrument of social democratic intervention in the independent schools sector, therefore, charitable status in Scotland may claim some success but has its limitations.

V.  Should Independent Schools be Excluded from Charitable Status in Scotland? Insistent voices are heard in Scotland calling for independent schools to be excluded from charitable status. Against the background of the status quo outlined in the previous section, should they be? In 2014, a petition to the Scottish Parliament called for the removal of ‘charitable status, and thus taxpayer support, from private, fee-paying schools’.94 The petition cited ‘the inherent inequity of taxpayer subsidy for these elitist institutions whilst their financially strapped state counterparts receive no such financial support’. The focus of the complaint was the 80 per cent relief from non-domestic rates accorded to independent schools, but not to state schools, which pay rates in full. More recently, Third Force News, the magazine of the Scottish Council for Voluntary Organisations, gave prominence to a survey of readers in which 77 per cent thought that private schools should not be charities.95 The report highlighted the UK-level reliefs available to independent schools as well as local rates relief and quoted a survey respondent’s remark that ‘they are not providing a public benefit and only serve a minority of the population who are given an unfair advantage in life because of their wealth and privilege’.96 92 Eg, the Fettes Trust report (n 75); see also OSCR, ‘File Note: Hutchesons’ Educational Trust. Report under s 33 of the Charities and Trustee Investment (Scotland) Act 2005 on Inquiry: Hutchesons’ Educational Trust (SC002922)’ (www.oscr.org.uk/media/1489/inquiry-report-hutchesons-educational-trust. pdf, 2011). 93 Fee-charging schools (n 62) para 14. 94 Public Petition No PE01531, 2014. The petition garnered 310 signatures in support. 95 S Smith, ‘Is the charity brand tarnished?’ (Third Force News, 28 August 2018). The survey was of 148 readers; 14% thought private schools should be charities, while 9% were not sure. 96 Ibid 12.

Independent Schools in Scotland: Should they be Charities?  195 The petition and survey disclose the same egalitarian concerns as the calls for abolition: independent schools are socially divisive, they divert resources from the main state system, and the manifest unfairness of their receiving rates relief while state schools pay in full highlights the deeper injustice that access to the best and best-funded schools depends on a family’s ability to pay fees. For the egalitarian, while it might be conceded that independent schools registered with OSCR must provide at least some public benefit, OSCR has not extracted enough in public benefit in return for the tax reliefs conceded, and the public funds absorbed by the reliefs would be better spent on state schools. A second-best to the outright abolition of independent schools, therefore, would be for the Scottish Parliament to step in and exclude them from charitable status. The free-market liberal might point out that the petition’s rates comparison does not compare like with like: mainstream independent schools are funded entirely by private money apart from charity tax reliefs, whereas state schools are funded entirely by the taxpayer. The public funding of state schools takes into account their obligation to pay rates, so if state schools are inadequately funded it is because the overall education budget is insufficient, not because they pay rates.97 If, on the other hand, independent schools are generally well-funded that is largely through the input of fee-paying families – families already contributing to the main state system through payment of taxes – with a comparatively modest input from public funds by way of tax reliefs. While the free-marketeer would concede that if the tax reliefs were withdrawn the public funds saved could in theory be devoted to improving state schools, in the case of rates relief this would mean a change in the existing arrangements for local government finance. Under present arrangements the additional rates collected would be retained by a local authority but its overall grant from the Scottish Government would be liable to a corresponding reduction, so provision would have to made for the extra rates collected to be earmarked for the local authority to spend on its state schools without any balancing adjustment to the overall grant.98 So far as the other tax reliefs are concerned, there would be difficulties in calculating the funds saved,99 as well as in allocating funds saved at UK level down to an education budget administered at devolved level. It might be doubtful also whether the sums involved, though significant for individual schools when enjoyed as tax relief, would bring about a material improvement in the main state system if reallocated as a supplement to the Scottish Government’s education budget.100

97 The overall level of local authority budgets is centrally controlled by the Scottish Government: Barclay (n 5) paras 3.40–3.43. 98 Ibid ann C, C36. See also Local Government and Communities Committee, Stage 1 Report on the Non-Domestic Rates (Scotland) Bill (SP Paper 596, 2019) para 108. 99 See text to n 57. 100 Net Revenue Expenditure on education by local authorities was budgeted at over £5bn for 2018–19: Scottish Government, Scottish Budget 2019–20 (Scottish Government, 2018) 87, Table 6.16; cf an anticipated saving in rates relief of £7m (see n 56).

196  Patrick Ford In turn, the social democratic interventionist might defend the status quo by insisting that, so long as the broad tenor of Scottish society remains as it is – economically liberal but with strong egalitarian aspirations – and fee-charging schools are permitted to exist, their public benefit commitments under the charity test provide a genuine counterbalance to their social and financial exclusiveness by stimulating facilitated access and community engagement at significantly higher levels than would be arrived at otherwise. So, although the calculations cannot be exact, it can be said that the taxpayer does in fact receive value for money in return for charity tax reliefs.101 As in the case of the arguments for and against abolition, these differing views on exclusion reflect differing visions of society which belong in the wider world of politics, not charity law. Whatever the policy adopted, however, certain technicalities would have to be taken into account in any project for reform.

A.  Technicalities of Exclusion As a first step, the Scottish Parliament might provide that any body registered as an independent school in Scotland would be automatically disqualified from registration in the Scottish Charity Register, with appropriate exceptions for the special-case schools. The schools currently entered in OSCR’s register would be removed and would cease to be charities but would continue in existence as noncharities. Secondly, however, consideration would have to be given to the operation of the de-registration asset lock. Unless disapplied by order, the asset lock would oblige each school to continue to apply its pre-removal assets in accordance with its purposes as they stood immediately before removal, although not necessarily, as the provisions for the asset lock stand, in such a way as to provide public benefit in accordance with the charity test.102 The schools would lose the various advantages of charitable status linked directly to registration with OSCR, in particular reliefs from non-domestic rates and LBTT. It is not a foregone conclusion, however, that de-registration would automatically deprive them of charity reliefs at UK-level without supplementary legislative intervention by the UK Parliament.103 Thirdly, therefore, it would have to be decided whether exclusion from charitable status should involve loss of UK as well as Scottish tax reliefs and the support of Westminster solicited as necessary.

101 See Biggar Economics, Economic Impact (n 32) 7 and 8. 102 2005 Act, s 19(1), (8). See Scottish Government, Consultation on Scottish Charity Law (Scottish Government, 2019) paras 68–72 for proposals for amendment. 103 See n 55. Prima facie a compulsorily de-registered body could still meet the conditions of relief for UK-level tax relief because it is not subject to ‘any requirement’ to be registered in the Scottish Charity Register: Finance Act 2010, s 30, sch 6, para 3(3).

Independent Schools in Scotland: Should they be Charities?  197

B.  Alternative Approaches – ‘Sink-or-Swim’ Given these technicalities, two contrasting approaches to exclusion might be considered. The first would proceed on the hard-line egalitarian basis that mainstream independent schools are elitist and socially divisive organisations which undermine the main state schools system and ought not to be charities. Independent schools would be excluded from charitable status and left to sink or swim without its advantages. The schools in OSCR’s register would be de-registered and express provision made to oblige them to apply their pre-removal assets for their pre-removal purposes in full conformity with the charity test; so facilitated access and wider community engagement would still be required. It would be expressly provided also that the schools would lose UK-level charity reliefs along with the other advantages of charitable status. For a Scots egalitarian, enlisting the support of Westminster for this element of the reform might be politically delicate, possibly involving a cap-in-hand approach to a UK Government disinclined to implement a specifically Scottish adjustment to the UK tax system, but excluding independent schools from charitable status in Scotland would lose half its point if it did not involve exclusion from all charity tax reliefs. Change along these lines would undoubtedly make life more difficult for Scottish independent schools and the families they serve.104 The loss of tax reliefs would mean increasing fees or cutting costs and standards, or a combination. Some schools, already on the edge of viability, might cease to operate. For boarding schools, the loss of reliefs would make it harder to compete with their equivalents in England and Wales in the UK and international markets for boarders. How effective would the ‘sink-or-swim’ approach be as a social democratic response to egalitarian concerns? On the one hand, the ultimate goal of abolition would be achieved in part, indirectly, if some independent schools went out of business, while the remainder would still be obliged to facilitate access and engage with the wider community but without the quid pro quo of tax reliefs; and the public funds saved could be applied to the state education budget. On the other hand, the schools most likely to survive would be the most prestigious and exclusive, which could command higher fees and would in consequence become more exclusive; bursaries would continue for a minority, but families only just able to meet fees at current levels would be pushed out and the fee-paying majority would be drawn from the better-resourced cohorts of the well-off. There would be a danger, too, that cost-cutting might engender a box-ticking response to the ongoing public benefit obligations under the charity test, with access and community engagement commitments trimmed to the minimum. In these circumstances, in

104 See Biggar Economics, Economic and Fiscal Contribution of Edinburgh’s Independent Schools: A report to Edinburgh’s Independent Schools (SCIS, 2018) para 6.4. Exclusion from UK-level charity reliefs might also be brought about by a Labour government at Westminster without any stimulus from Scotland: see n 25.

198  Patrick Ford the absence of the carrot of tax reliefs, the efficacy of the asset lock as an enforcement mechanism would come under scrutiny. It would be questionable whether OSCR, with responsibility for over 24,000 charities, and with lesser powers under the asset lock than under the main charities regime, would be in practice an appropriate agency to oversee the ongoing public benefit commitments of a small group of former charities.105 And as already noted, application of the funds saved in tax reliefs to achieve measurable improvements in the main state system would not be straightforward.106 Overall, therefore, the merits of exclusion on a ‘sink-or-swim’ basis would be mixed.

C.  Alternative Approaches – ‘Education, not Charity’ An alternative would be to take mainstream independent schools out of the charities system altogether, not in order to punish them for elitism, but to integrate them more fully with the main state education system and to maximise their contribution to it. The starting point would be that charitable status is an imperfect instrument for implementing educational policy,107 and that wider access to independent schools and their engagement with the state schools system and wider community belong in the sphere of education, not charity law. Under the charity test, commitments in these areas are in principle left to the discretion of each school, with OSCR as the arbiter of their public benefit value, but it is not OSCR’s role to take a policy overview of the commitments at sector level. One of the chief merits of this alternative would be to move the debate on independent schools away from the specifics of charity law and taxation to where there could be open discussion, as a matter of educational policy, of how best to reconcile egalitarian aspirations with freedom of choice, perhaps by social democratic intervention going well beyond the requirements of the charity test. The issues of social divisiveness and diversion of resources might be addressed by building on existing commitments, but under the banner of an educational partnership between the independent and state school sectors in the service of the declared objective of the current reform of the main state system: ‘to close the unacceptable gap in attainment between [the] least and most disadvantaged children [in Scotland] and to raise attainment for all’.108 On this approach, independent schools would be removed from OSCR’s register and the de-registration asset lock would apply, but in adapted form. A school’s ongoing obligation to administer its pre-removal assets in accordance with its

105 For the practicalities, see OSCR, Protecting the assets of former charities: OSCR’s monitoring of ­charitable assets 2006–11 (OSCR, 2012). 106 There would also be at least the possibility of a challenge to the withdrawal of tax reliefs under the European Convention on Human Rights, Protocol 1, art 2: see Morris (n 25) 26, 27. 107 See Dunn (n 27) 501–513; also Synge (n 45) ch 10. 108 See n 11.

Independent Schools in Scotland: Should they be Charities?  199 ­ re-removal purposes would be overseen by Education Scotland instead of OSCR, p and its public benefit commitments under the charity test replaced by parallel obligations applied through the registration regime for independent schools and aimed at closer integration with the main state system. There might be a place for the schools, for instance, in the Regional Improvement Collaboratives currently being developed for state schools, where they might have useful contributions to make on operational autonomy, school leadership and parental engagement. For the old endowment and proprietary day schools, this might be something of a return to the old days, when their own educational provision and the provision of the state secondaries could be thought of as complementary: having grown apart since the introduction of comprehensives, the new direction being urged on state schools might bring state- and privately-funded schools closer together again. Engagement with the wider public might be systematised on the model of modern community campuses, where state schools and the general community share facilities such as swimming pools and gyms. On this approach, state subsidy for independent schools would be a matter for transparent policy debate. The schools would lose their charity tax reliefs – in principle at both devolved and UK levels – and any taxpayer support would come from the state education budget if anywhere. The egalitarian might resist any form of public subsidy, while the free-market liberal might highlight the positive role of fee-payers as part-funders of Scottish school education and seek at least some state support, arguing that the effect would be to reduce fees and open up schools to a wider range of fee-paying families. For the social democrat, the challenge would be how best to harness for the wider public good the willingness of those who can afford it to pay high fees for their own family’s education. Any state subsidy decided on could be tied more accurately to the actual costs to schools of their service to the wider community than tax relief under the present system. On the face of it, the ‘education, not charity’ alternative has at least the potential to meet egalitarian concerns more constructively than the ‘sink-or-swim’ approach. Much goodwill would be needed on all sides to make it work in practice and, ideally, usher in a genuine revival of the pre-comprehensives era of equality of excellence between independent and state schools. As things stand, however, nothing of this kind has been mooted by the Scottish Government, which must surely have its energies fully engaged with the current reform of the state sector without adding independent schools to the equation.

D.  Should Independent Schools be Excluded from Charitable Status in Scotland? The policy of the present Scottish Government towards mainstream independent schools, adopted from its predecessors, can be characterised as pragmatic with a social democratic dimension. The schools are permitted to operate with maximal autonomy and minimal regulation, funded largely by fee-payers though

200  Patrick Ford with modest state subsidy in the form of charity tax reliefs; concerns as to social divisiveness and detriment to the state sector are addressed by mitigation arrangements mediated through the charities system as a quid pro quo for tax reliefs. If independent schools are not to be abolished in Scotland, therefore, any proposal for excluding them from charitable status must be judged on its social democratic merits as against the status quo. By this yardstick, the merits of the ‘sink-or-swim’ approach are mixed. The alternative ‘education, not charity’ approach has much more to offer, not least by relocating the debate about mainstream independent schools in Scotland firmly in the sphere of education. Whatever its merits in theory, however, in practice this approach, for the moment at least, has no political champions. So, the status quo has its attractions, despite its blurring of charity law and educational policy. Should independent schools be excluded from charitable status, therefore? On balance, no, and it is easy to see why, in the face of calls for exclusion, the Scottish Government’s response has until recently been to allow the status quo to stand: whether an independent school meets the charity test is for OSCR to decide, in the light of the adequacy of the school’s facilitated access and community engagement commitments, and if it does meet the test it is entitled to the full range of advantages attaching to charitable status.

VI.  Should Independent Schools Enjoy the Full Range of Charity Tax Reliefs? If mainstream independent schools are not to be abolished in Scotland and are not to be excluded from charitable status, should they be allowed the full range of tax reliefs accorded to charities generally? It seems clear that before Barclay, the Scottish Government would have answered ‘yes’. Now, mainstream independent schools which are charities are set to lose their mandatory entitlement to 80 per cent relief from non-domestic rates while retaining their charitable status and its other advantages.109 They are also to be excluded from the possibility of receiving discretionary relief from local authorities under the existing power to remit up to 100 per cent.110 The Barclay recommendation resembles a mild version of the ‘sink-or-swim’ approach to exclusion and can be seen to have similarly mixed merits. The schools are still to be subject to the public benefit requirements of the charity test, but there is a risk that loss of relief will lead to higher fees and greater exclusivity and

109 See n 6. Provisionally, relief would be removed from 2020–21. Additional Support for Learning schools and specialist music schools would be exempted: Non-Domestic Rates (Scotland) Bill, s 10(3), (4). The proposal assumes the ongoing availability of charity reliefs at UK level, but see (now) n 25. 110 See LG(FP)(S)A 1962, s 4(5). The power has up to now been exercisable only in respect of the 20% balance above mandatory relief for charities.

Independent Schools in Scotland: Should they be Charities?  201 to box-ticking on facilitated access and community engagement.111 There may be a risk also that with the carrot of advantages much reduced Scottish charitable status may cease to be attractive to some mainstream schools, which may contemplate voluntary removal from OSCR’s register despite the disincentives.112 They might yet retain tax reliefs at UK level,113 and loss of use of the charity brand might have little impact on the loyalty of their main donor base of parents and alumni. They would be bound under the asset lock to apply their pre-removal assets for their pre-removal purposes, but most schools would plan to do that anyway. Crucially, however, as the provisions of the asset lock stand, by de-registering, a school would release itself from its public benefit commitments under the charity test. If, in the event, the schools retained eligibility for UK tax reliefs, that would require much less demanding levels of public benefit provision than the charity test.114 As the rationale for its recommendation, Barclay pointed to the fact that state schools do not enjoy the same relief as independent schools and generally pay rates – an ‘inequality’ which should be brought to an end.115 As we saw earlier, if removing charity rates relief from independent schools is to help state schools, local authorities must be permitted to retain the extra rates collected as a net addition to their education budget for expenditure, prima facie, on their own state schools. If this change were made, however, and local authorities retained discretionary power to grant up to 100 per cent charity relief to independent schools,116 that would open the way to a new form of partnership between local authorities and mainstream independent schools which might replicate certain features of the ‘education, not charity’ approach to exclusion suggested above. A local authority would be in a position to negotiate with the schools in its area for ‘top-up’ of the public benefit provided under the charity test in return for an award of discretionary rates relief. The baseline would be the commitments to facilitated access and community engagement already established, but these could be rationalised and extended in a way sensitive to local conditions, possibly within the framework of the Regional Improvement Collaboratives. Guidance could be provided by Education Scotland to ensure some consistency of approach across the Scottish schools system as a whole.117 The calculation for local authorities would be whether the state system in their area would receive better value for money from partnerships with independent 111 See OSCR, Submission: Call for views on the Non-Domestic Rates (Scotland) Bill (OSCR, 2019) 2. 112 Ibid. OSCR also points to the risk of damaging public confidence in charities and charity law by creating a ‘two-tier’ charity sector in which some charities are treated differently from others for certain purposes within a ‘single-tier’ regulatory system. 113 See n 55. If, under a Labour Government at Westminster, UK-level charity reliefs were withdrawn, that would be a further motive for voluntary de-registration: see nn 25 and 54. 114 See text to nn 46, 47. 115 Barclay (n 5) para 4.120. 116 Pace Non-Domestic Rates (Scotland) Bill Policy Memorandum, para 92, which dismisses this possibility without argument. 117 See Non-Domestic Rates (Scotland) Bill, s 11 for a proposed scheme of central guidance on discretion to remit.

202  Patrick Ford schools developed in return for discretionary rates relief than from direct investment of the additional rates collected if relief were not allowed. A local authority could not push too hard, however. An independent school would make its own calculation of how much the relief being offered would be worth to it. If too much were being asked by way of top-up above its charity test commitments, a school could opt to forgo relief and pay rates in full, and possibly de-register voluntarily from charitable status altogether. So, should independent schools which are charities be allowed the full range of tax reliefs accorded to charities generally? Ideally, perhaps, yes. The Scottish Government’s original preference for the status quo, with its full carrot of advantages attaching to charitable status, had much to recommend it as likely to elicit a more than minimalist response to a school’s public benefit obligations under the charity test. Removing half the carrot may have unintended consequences. It would still be possible, however, to replace that half of the carrot with the possibility of 100 per cent discretionary relief from local authorities.

VII.  Conclusions – Relevance for England and Wales? Revisiting here the three questions posed at the beginning of the chapter and summarising the conclusions arrived at provides an opportunity for a brief reflection on the possible relevance of the Scottish debate for England and Wales.

A.  Should Independent Schools be Abolished? In Scotland, there is limited political momentum for the abolition of mainstream independent schools, but egalitarian arguments for abolition inform persistent calls for exclusion of the schools from charitable status: independent schools are out of kilter with the comprehensives ideal, serve mainly a privileged minority who can afford high fees, divert resources from state schools by virtue of their better funding, financed by fees, and entrench privilege by delivering more favourable life chances to their fee-paying constituency than state schools to their non-­fee-payers. Scottish Government policy is pragmatic: independent schools are quality schools, supply a significant proportion of day school provision in the main cities, and are largely self-funded; no abolition, therefore, but social democratic intervention through charitable status can take the edge off the ills identified by the egalitarian. In England and Wales, the rationale for abolition, or at least for fundamental reform, is essentially the same – independent schools are ‘engines of privilege’ which flourish at the expense of the state system118 – but the educational landscape



118 See

generally Green and Kynaston (n 25).

Independent Schools in Scotland: Should they be Charities?  203 is different. State-supported secondary school provision is more varied than in Scotland,119 and English ‘public schools’, those expensive boarding schools with limited local loyalties, are a more prominent presence than their equivalents in Scotland and more glaringly exclusive than the large day schools in Edinburgh and Glasgow. The ‘gilded path’ from prestigious fee-charging school to power, influence and well-remunerated career, often via Oxbridge, is a statistically identifiable ‘British’ phenomenon,120 but perhaps more clearly discernible in England than in post-devolution Scotland: of the six Scottish First Ministers so far, all but one – the first – attended state secondary schools.121 The Labour party’s revived interest in abolition is a more significant political phenomenon in England and Wales than in Scotland, though removal of UK-level charity reliefs by a Labour Government at Westminster would impact Scottish independent schools no less than those south of the Border. The policy of social democratic intervention through charitable status initiated by Tony Blair’s Labour has survived under Conservative governments, but operates against a more complex educational background than in Scotland, and seeks to bridge what is probably a larger privilege gap between the independent and state sectors.

B.  Should Independent Schools be Excluded from Charitable Status? In Scotland, with no real prospect of abolition, the focus has been on the efficacy of social democratic intervention. The status quo of intervention through charitable status can claim some success: levels of facilitated access and engagement with the wider educational and general communities have been raised and independent schools can be held to their commitments by OSCR. Certain distinctive features of the 2005 Act have allowed this: OSCR can review a charity’s conformity with the charity test periodically; the charity test authorises examination of a charity’s feecharging practices as part of a factual assessment of its provision of public benefit, and the ‘unduly restrictive condition’ provisions and holistic character of the charity test in combination allow OSCR to accept facilitated access and community engagement in mitigation of high fees; and the stick of removal from the Scottish Charity Register gives OSCR a firm hold over uncooperative charities. Exclusion from charitable status on a ‘sink-or-swim’ basis would be an uncertain advance on the status quo: fees and exclusiveness might increase, and removing the carrot of advantages while relying on residual enforcement by OSCR might compromise the public benefit commitments brokered through the schools

119 www.gov.uk/types-of-school. 120 Green and Kynaston (n 25) 4–7. 121 The late Donald Dewar attended the independent Glasgow High School. The six include Jim Wallace, now Lord Wallace of Tankerness, who twice served as acting First Minister.

204  Patrick Ford review without generating compensating improvements in the state sector. The alternative of exclusion on an ‘education, not charity’ approach might be the ideal in terms of both transparency and potential for social democratic intervention but has no political friends. So, in practice – but for the Barclay bombshell, and now the possibility of withdrawal of charity tax reliefs at UK level under a Labour administration – we would be left in Scotland with the status quo. In England and Wales, Labour’s original social democratic initiative can be declared a comparative failure in the light of the ISC case. The Charity Commission does not have the same power of periodic review as OSCR; the public benefit requirement in English charity law does not authorise application of a reasonableness test to fees, nor, in the case of a fee-charging school, negotiation of a mitigatory programme of bursary provision or collaboration with the state sector; and the Commission’s power to remove an institution from its register cannot be used in the same straightforward way as OSCR’s as a mechanism for enforcing a charity’s public benefit obligations.122 These weaknesses in the English arrangements have been acknowledged by a (Conservative government) proposal for legislation to remove the benefits of charitable status – but not charitable status itself – from schools which fail to meet specified benchmarks for bursary provision and partnership with the state system.123 Independent schools which were charities would then be in broadly the same position as their equivalents in Scotland: the statutory benchmarks would be similar to the requirements for access and community engagement generated under the charity test, and the ‘stick’ of removal of the benefits of charitable status would be similar in effect to removal from OSCR’s register. Exclusion of independent schools altogether from charitable status in England and Wales on a ‘sink-or-swim’ basis – whether as an end in itself or as a step towards abolition – would be a major undertaking because of the size of the sector and the complexity and antiquity of English charity law;124 so the ‘sink-or-swim’ option would be likely to fare even less well in a cost-benefit analysis than its equivalent in Scotland. The ‘education, not charity’ option would be no less of an undertaking but would have greater theoretical attractions. The benchmarks proposal may be criticised as intruding educational policy into charity law: the benchmarks would be set by the Department of Education and would override, for independent schools, the law on public benefit applicable to other charities – perhaps better, therefore, in the name of transparency, to remove independent schools from the ambit of charity and legislate for the desired social democratic outcomes as unequivocally matters of educational policy.

122 See Charities 2011 Act, s 34 and Synge (n 45) 239. 123 Charitable status (n 57) para 4.1. 124 See n 25. The ISC has a UK membership of 1,364 schools of which the vast majority are located in England and Wales: ISC, ISC Census and Annual Report 2019 (www.isc.co.uk). As to the complexities, see Synge (n 45) 239.

Independent Schools in Scotland: Should they be Charities?  205 In any event, the benchmarks proposal is currently in abeyance, with schools working towards similar standards voluntarily in cooperation with the Department of Education, although with the threat of legislation looming as a ‘stick’ in the background.125 From a Scottish perspective, however, it looks as if something more definite may be needed, certainly in the context of renewed political enthusiasm for abolition.

C.  Should Independent Schools Enjoy the Full Range of Tax Reliefs? In Scotland, the Scottish Government has answered ‘no’ to this question and is promoting legislation to remove all charity rates relief from independent schools while leaving their charitable status otherwise intact. Again, there is a risk of higher fees and greater exclusivity and compromise of mitigation measures by cost-cutting. On the view that removal of the existing relief upsets a necessary balance between carrot and stick in the operation of charitable status as a means towards social democratic ends, the balance might be restored by allowing local authorities full discretion to award charity rates relief in return for top-up contributions to local education negotiated over and above those required by the charity test. In England, it has not been Conservative government policy to follow ­Scotland’s lead on rates relief, although the idea is being considered by the Welsh Government.126 The analysis offered here for Scotland suggests that if the carrot of tax advantages is to be left intact in England, more work is indeed needed on the stick if charitable status is to be effective in pushing independent schools towards higher levels of bursary provision and collaboration with the state sector. Such considerations would, of course, be swept aside under the radical option for abolition now re-espoused by Labour, and the concomitant removal of charity reliefs at UK level would have a significant impact on the carrot-stick balance in Scotland also. Overall, what message might be sent from Scotland as a contribution to the debate on the charitable status of independent schools in England and Wales? Perhaps, with due deference, a Scottish commentator might risk something like this: Your ‘private school problem’ is bigger than ours. Your charitable status is less effective than ours as an instrument of social democratic intervention to mitigate the exclusiveness of fee-charging schools. You can either legislate to introduce schools-specific benchmarks into the public benefit requirement of your charity law and enforce them

125 Charitable status (n 57) para 4.3. 126 Answer to Commons Written question 216113 (4 February 2019); Answer by Minister for Finance and Trefnydd, Welsh Assembly Plenary (30 January 2019).

206  Patrick Ford with the threat of removal of the advantages of charitable status, or you can bite the bullet and take independent schools out of the charities system altogether and address your problem head-on in the sphere where it properly belongs – the sphere of education. If you take the second option, large though the project will be, it can be progressed transparently, unclouded by the technicalities of charity law, with open discussion of the conflicts generated by differing visions of society – egalitarian, free-market liberal and variations in between – and their possible resolution, as a compromise option, by social democratic intervention. In Scotland, it seems likely that we will retain our own status quo, as adjusted post-Barclay, at least for the time being, but we will follow your ‘education, not charity’ project with admiration as representing the best way forward in theory, asking ourselves as the debate proceeds, ‘Can it be made to work in practice?’. If, in the event, charity tax reliefs come to be removed at UK level, we may well find ourselves following in your footsteps.

10 Licking their Own Lollipops: What do Charities and the Public Think about the Regulation of Charitable Activities? EDDY HOGG

I. Introduction An understanding of how charities and the public perceive charity regulation – what it is like and what it should be like – is an increasingly relevant and important question in light of significant recent political and media attention towards how charities and their activities are regulated. The regulation of charities is far from new, in England dating back to the Charitable Uses Act 1601. For over 400 years, charities have been subject to a range of regulatory mechanisms with which they must comply in order to maintain their charitable status and the benefits it confers. Despite this long history, we know comparatively little about what donors and charities themselves think about how charities are regulated. Public interest theory suggests that regulation benefits both parties – charities because regulation allows them to be seen as trustworthy and the public because they can donate to charities and benefit from their activities with confidence. Public interest theory asserts that the accountability that regulation signals is an important element in maintaining and growing public trust in charitable ­organisations.1 Governments – often but not always the driving force behind ­regulation – and charitable organisations emphasise the need for regulation to ensure that charitable organisations remain highly trusted.2 This is more necessary for charitable organisations than for public or private sector organisations: the latter can compel their funders – taxpayers – to contribute to their operation 1 M Sloan, ‘The Effects of Nonprofit Accountability Ratings on Donor Behavior’ (2009) 38 Nonprofit and Voluntary Sector Quarterly 220. 2 E Burt and J Taylor, ‘Striking the Regulatory Balance in the Unique Case of the Voluntary Sector’ (2004) 24(5) Public Money and Management 297.

208  Eddy Hogg costs while the latter must show to their funders – customers – that the product(s) they are selling are worth the price being charged. Charities have neither of these mechanisms in their arsenal. They cannot simply compel people to donate, nor in many instances can they show their donors what their money is paying for, at least not in a straightforwardly transactional sense. Charities therefore rely on the trust and confidence of potential donors in order to receive the donations they need to operate – public interest theory argues that the central goal of regulation is to build this trust and confidence. It is because of this that Sargeant and Lee state that ‘the concept of trust lies at the heart of charity’.3 We must not take this trust for granted or assume that it is a natural occurrence of charities’ organisational form. Just as the activities that charities undertake can help to grow trust and confidence in both that organisation and in the wider charitable sector, so too can the activities of charities undermine trust and confidence. In recent years, the citing in a number of British newspapers of charity fundraising practices as the reason for the suicide of 92-year-old charity fundraiser Olive Cook and the revelations about sexual abuse by employees of Oxfam and other international aid organisations have harmed trust and confidence not just in the charities involved but also in the sector as a whole. While regulation can never completely prevent such activities, it is the mission of the Charity Commission for England and Wales to provide robust and visible regulation that gives the public the perception that charities are trustworthy and can give them confidence that donations will be used in accordance with the organisation’s mission. Therefore regulation is important for both charities and for donors, lending charities a legitimacy that should make them more attractive to potential donors and providing donors with a confidence that their donations will be utilised to best effect. Nonetheless, for both groups it is important that the benefits they receive from adhering to regulatory standards outweigh the costs associated with this adherence.4 An examination of public attitudes to charity regulation is necessary if this balance is to be achieved so that the benefits of regulation put forward by public interest theory can be enjoyed. Part II of this chapter begins (A) by exploring regulation in theory – examining why scholars from a range of disciplines have argued that regulation of charities has positive outcomes for charitable organisations and their donors. It then looks (B) at how charities are currently regulated in England and Wales and beyond, before turning to look (C) at the differences between self-regulation and stateimposed regulation. The next two sections (Parts III and IV) look at the attitudes to charity regulation of those who work in charities and of the general public, assessing whether they feel current levels of regulation are suitable, what they think 3 A Sargeant and S Lee, ‘Improving Public Trust in the Voluntary Sector: An Empirical Analysis’ (2002) 7 International Journal of Nonprofit and Voluntary Sector Marketing 68. 4 C Cordery, ‘Regulating Small and Medium Charities: Does it Improve Transparency and ­Accountability?’ (2013) 24 Voluntas: International Journal of Voluntary and Nonprofit Organizations 813.

Licking their Own Lollipops  209 regulation should look like and how they feel regulation should be ­organised. The chapter concludes (Part V) by arguing that attitudes of key stakeholders to charity regulation matter and by calling for further research to look at what the public and charities think of how charities are regulated. While the majority of this chapter is based on a thorough analysis of existing academic and grey literature, it also contains analysis of four focus groups conducted with a sample of donors and non-donors in November and ­December  2015.5 A more detailed examination of this research, and its methodological approach, can be found in an earlier article by the author of this chapter.6

II.  What Do We Know about Regulation? A.  Regulation in Theory Before we explore what the public and those who work in charities think about charity regulation, it is worth pausing to consider the theoretical case for regulation in general and for the regulation of charities in particular. Regulators, such as the Charity Commission for England and Wales, need to balance the positive outcomes identified by theories on regulation, in particular public interest theory, with the strain that an increased regulatory regime will impose. This includes unintended and indirect consequences of regulation.7 In this balance, the views of donors and of charities need to be taken into account, yet they are often absent from debates around charity regulation. What constitutes regulation is contested and, as the next section explores, the regulation with which organisations must comply rarely comes from one source alone. Further, different regulatory regimes vary in character, from a very specific set of commands to a much lighter-touch set of broad guidelines or principles. Nonetheless, the rationale for regulation, whether it seeks to restrict what organisations can do or to support and enable then, is based on the assumption that regulation delivers some ‘good’ for organisations, society or both. Perhaps the most widely cited theory in support of regulation is public interest theory. Public interest theory argues that regulation is a means to protect public interests from being neglected in favour of private interests.8 Put simply, without

5 Four focus groups were undertaken in central London in November and December 2015. Each focus group contained a representative sample (in terms of age, gender and socio-economic group) of 10 participants. This research was funded by the Charity Finance Group and was granted ethical approval by the University of Kent’s Ethics Committee in October 2015. 6 E Hogg, ‘What Regulation, Who Pays? Public Attitudes to Charity Regulation in England and Wales’ (2018) 47 Nonprofit and Voluntary Sector Quarterly 72. 7 Burt and Taylor, ‘Striking the Regulatory Balance’ (2004) (n 2). 8 M Hantke-Domas, ‘The Public Interest Theory of Regulation: Non-Existence or Misinterpretation?’ (2003) 15 European Journal of Law and Economics 165.

210  Eddy Hogg regulation organisations may see the cost of providing information about their operations as being greater than the benefits of providing this information.9 As such, their ‘customers’ – in the case of charities, their beneficiaries and donors – will not know whether the organisation is operating effectively and ethically. The theory suggests that effective regulation makes organisations more transparent by reducing information asymmetry, allowing a competitive market to operate and ensuring that resources are distributed in a way which serves the public interest.10 Because of this, regulation generally requires organisations to report publicly on how they are complying with the regulatory regime, so that interested stakeholders can see that they are meeting the agreed standards.11 Information asymmetry, one of the key things that public interest theory suggests that regulation can help to prevent, is a key feature in the relationship between charities and donors in particular. Unlike buying a product, where the customer themselves can make a judgement as to the quality and value for money that the good provides, donors are not themselves able – in most circumstances – to assess the quality of what their donation has paid for. Hyndman and McDonnell outline why this issue is particularly acute in charities: A key feature of the relationship between charity and donor is information asymmetry. When a donor gives money to a charity, he or she will not have as much information as the people within the charity about both the charity’s intentions with regard to the use of the donation, as well as the actual usage of the money following the donation.12

They go on to argue that because of this lack of information, donors will be reluctant to donate because they do not know where their money is going and might be concerned that charities and their staff will use donated resources for their own gain.13 Public interest theory therefore suggests that charity regulation is necessary in order to support the functioning of a market driven by donors and funders, in which charities demonstrably practice good governance in an accountable and open way.14 9 G Stigler, ‘The Theory of Economic Regulation’ (1971) 2 The Bell Journal of Economics and Management Science 3; M Gaffikin, Regulation as Accounting Theory (Wollongong, University of Wollongong, 2005); Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4). 10 T Christensen and P Lægreid, ‘Agentification and Regulatory Reforms’ in T Christensen and P Lægreid (eds), Autonomy and Regulation. Coping with Agencies in the Modern State (Cheltenham, Edward Elgar, 2006); Cordery (n 4). 11 C Connolly and N Hyndman, ‘Towards Charity Accountability: Narrowing the Gap between Provision and Needs?’ (2013) 15 Public Management Review 945; SD Phillips and SR Smith, ‘Between Governance and Regulation: Evolving Government-Third Sector Relationships’ in SD Phillips and SR Smith (eds), Governance and Regulation in the Third Sector: International Perspectives (New York, Routledge, 2011); C Cordery and M Deguchi, ‘Charity Registration and Reporting: A CrossJurisdictional and Theoretical Analysis of Regulatory Impact’ (2018) 20 Public Management Review 1332. 12 N Hyndman and P McDonnell, ‘Governance and Charities: An Exploration of Key Themes and the Development of a Research Agenda’ (2009) 25 Financial Accountability and Management 5, 14. 13 Ibid. 14 L Mayer and B Wilson, ‘Regulating Charities in the Twenty-First Century: An Institutional Choice Analysis’ (2010) 85 Chicago-Kent Law Review 479; C Cordery, D Sim and T Zijl, ‘­Differentiated

Licking their Own Lollipops  211 The effective regulation of charities (in principle, at least) allows them to demonstrate their efficiency and effectiveness and allows for the growth of confidence in organisations and trust in the sector as a whole, growth that will potentially leverage higher donations.15 Additionally it should lead to resources – in the case of the charity sector philanthropic donations – being distributed to those organisations, which use them in the most efficient and effective way to meet their charity mission.16 While effective regulation may help to build both confidence in individual charities and trust in the charity sector as a whole, there is little empirical evidence for a positive relationship between trust in charities and donating behaviour. Previous academic work has looked at trust and confidence and volunteering17 with varying results, but few have looked at the relationship between trust, confidence, and charitable giving. O’Neill sums it up by saying that ‘the relationship between trust and behavior is complex’.18 The small amount of empirical work that has sought to explore this relationship finds that regulation does have an impact, albeit not necessarily the clearly positive one that public interest theory suggests. Notably, Sloan found that the high accountability ratings for nonprofits in the US lead to higher donor contributions, but that lower ratings do not lead to lower contributions.19 While there are clearly potentially positive impacts of effective regulation on charities in terms of increased accountability, transparency, donor trust and (potentially) on increased donations, there are also potential negative consequences for charities of complying with regulation.20 Cordery argues that while there is a need for regulation, it should aim to be as light a touch as possible, to avoid placing unnecessary reporting burdens on nonprofit organisations.21 The costs of regulation, both direct and indirect, mean that it is important that the right balance is reached between effective regulation and not imposing too high a cost on charities.22 Corry too argues that, given any regulation will place some burden

­ egulation: The Case of Charities’ (2017) 57 Accounting and Finance 131; Cordery and Deguchi, R ‘­Charity registration and reporting’ (2018) (n 11). 15 OB Breen, ‘Regulating Charitable Solicitation Practices: The Search for a Hybrid Solution’ (2009) 25 Financial Accountability and Management 115; Cordery, Sim and Zijl, ‘Differentiated Regulation’ (2017) (n 14). 16 Gaffikin, Regulation as Accounting Theory (2005) (n 9). 17 R Bekkers and W Bowman, ‘The Relationship between Confidence in Charitable Organizations and Volunteering Revisited’ (2009) 38 Nonprofit and Voluntary Sector Quarterly 884; W Bowman, ‘Confidence in Charitable Institutions and Volunteering’ (2004) 33 Nonprofit and Voluntary Sector Quarterly 247; H Taniguchi, ‘The Influence of Generalized Trust on Volunteering in Japan’ (2013) 42 Nonprofit and Voluntary Sector Quarterly 127. 18 M O’Neill, ‘Public Confidence in Charitable Nonprofits’ (2009) 38 Nonprofit and Voluntary Sector Quarterly 237, 243. 19 Sloan, ‘The Effects of Nonprofit Accountability Ratings on Donor Behavior’ (2009) (n1). 20 R Irvin, ‘State Regulation of Nonprofit Organizations: Accountability Regardless of Outcome’ (2005) 34 Nonprofit and Voluntary Sector Quarterly 161. 21 Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4). 22 Burt and Taylor, ‘Striking the Regulatory Balance’ (2004) (n 2).

212  Eddy Hogg on charities, it should not be any more stringent than is absolutely necessary so as not to dampen or damage the essential qualities of charities – meaningful voluntary participation, independence and autonomy.23 If the demands that regulation places are too burdensome, it can be an extremely expensive way of increasing public trust, particularly given the fairly weak relationship between regulation, trust and increased giving.24 The following sections of this chapter consider in turn charities’ and donors’ views on regulation. First, though, it is worth reviewing how charities are currently regulated in England and Wales, and beyond.

B.  How are Charities Currently Regulated in England and Wales, and Beyond? The long history of charity regulation in England and Wales is anomalous, with most countries having only implemented regulatory schemes for charities in more recent times. Nonetheless, recent decades have seen a steady growth in the number of countries introducing or strengthening charity regulation.25 This is not a phenomenon peculiar to charities, with other areas of the economy and ­society also experiencing increases in regulation over the same period.26 In order to deliver the benefits identified (in theory) above, regulation requires that charities make publicly available certain financial and non-financial information about their operations and, in some jurisdictions, on the difference they make in the communities in which they operate.27 In return for complying with these requirements, many countries provide specific benefits for registered charities including (but not limited to) tax relief on donations and other income, reduced taxes at local and national level and preferential or sole access to government and philanthropic funds.28 Governments offer these concessions as a way to encourage charities to

23 O Corry, ‘Defining and Theorising the Third Sector’ in Rupert Taylor (ed), Third Sector Research (London, Springer, 2010). 24 R Bekkers, ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) 32 Nonprofit and Voluntary Sector Quarterly 596. 25 Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4); OB Breen, A Dunn and M Sidel, Regulatory Waves: Comparative Perspectives on State Regulation and Self-Regulation Policies in the Nonprofit Sector (Cambridge, Cambridge University Press, 2017). 26 Cordery, Sim and Zijl, ‘Differentiated Regulation’ (2017) (n 14); Cordery and Degichu, ‘Charity Registration and Reporting’ (2018) (n 11). 27 Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4). 28 A Abramson, L Salamon and C Steurle, ‘Federal Spending and Tax Policies: Their Implications for the Nonprofit Sector’ in ET Boris and CE Steurle (eds), Nonprofits and Government: Collaboration and Conflict (Washington, DC Urban Institute Press, 2006); Breen, ‘Regulating Charitable S­ olicitation ­Practices’ (2009) (n 15); G Smith, ‘Capital Structure Determinants for Tax-Exempt Organisations: Evidence from the UK’ (2012) 28 Financial Accountability and Management 143; Cordery, Sim and Zijl, ‘Differentiated Regulation’ (2017) (n 14).

Licking their Own Lollipops  213 comply with regulation and because charities and those who donate to them can help to reduce the need for state spending and to provide the benefits for communities and society identified by sociologists and other thinkers for centuries.29 Section 14 of the Charities Act 2011 requires the Charity Commission to ‘increase public trust and confidence in charities’, to ‘promote awareness and understanding of the operation of the public benefit requirement’, to ‘promote compliance by charity trustees with their legal obligations in exercising control and management of the administration of their charities’, to ‘promote the effective use of charitable resources’ and to ‘enhance the accountability of charities to donors, beneficiaries and the general public’. As part of its role of ‘encouraging and facilitating the better administration of charities’,30 the Charity Commission provides advice and support to registered charities (albeit not as much as it once did, due to declining finances), while registered charities must submit annual financial returns to the Commission and conform to a range of other hard and soft law controls.31 To avoid this being too onerous on smaller organisations, charities with incomes of below £250,000 submit simplified accounts.32 Since 2008, charities have been required to provide reports on the activities they have undertaken to accomplish their stated public benefit.33 Charity regulation in England and Wales is considered by Phillips and Smith to have ‘set the standard’ in charity regulation.34

C.  State Regulation versus Self-Regulation Regulation does not have to come from the state. If the benefits of regulation that public interest theory identifies do indeed increase trust in charities and in turn increase donations, then charities have a clear incentive for establishing their own self-regulation regime. In doing so, they can maintain autonomy, to some extent,

29 L Salamon, ‘Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government-Nonprofit Relations in the Modern Welfare State’ (1987) 16 Journal of Voluntary Action Research 29; N Hyndman and D McMahon, ‘The Evolution of the UK Charity Statement of Recommended Practice: The Influence of Key Stakeholders’ (2010) 28 European Management Journal 455; Cordery, Sim and Zijl, ‘Differentiated Regulation’ (2017) (n 14). 30 Charities Act 2011, s 15(1). 31 Charities Act 2011; see Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4); D Morris, ‘The Case of England and Wales: Striking the Right Balance of “Hard” Law versus “Soft” Law’ in SD Phillips and SR Smith (eds), Governance and Regulation in the Third Sector: International Perspectives (New York, Routledge, 2011). 32 Charities Act 2011, s 145(3). 33 Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4); G Morgan and N Fletcher, ‘Mandatory Public Benefit Reporting as a Basis for Charity Accountability: Findings from England and Wales’ (2013) 24 Voluntas: International Journal of Voluntary and Nonprofit Organizations 805. 34 SD Phillips and SR Smith, ‘Between governance and regulation: Evolving government-third sector relationships’ in SD Phillips and SR Smith (eds), Governance and Regulation in the Third Sector: ­International Perspectives (New York, Routledge, 2011), 13.

214  Eddy Hogg over how they are regulated while also demonstrating their ­trustworthiness.35 Put simply, ‘[s]elf-regulation aims to signal virtue and quality of operations, mitigate malfeasance, redeem damaged reputations and renew public trust, leading to reinforced legitimacy and increased power and access to resources’.36 By self-regulating, charities signal to potential donors and funders that they are trustworthy, while also signalling to governments that they do not require the imposition of more restrictive regulation.37 Often events involving charities, or simply a change in the public mood, can lead to calls for increased regulation of charities, and self-regulation can be a good way to prove that charities are taking public and governmental concerns seriously.38 In this sense, self-regulation often represents an attempt by charities to be seen taking the initiative rather than waiting for the state to force them to act.39 It relies on charities seeing it as being in their interests to be regulated and collective will among a group of charities to act together in order to raise and/or demonstrate their standards. It is likely that there is a mix of motivations for organisations engaging in self-regulation, including: pre-empting government intervention; increasing trust; sharing best practice with other organisations and; appearing as part of a group of reputable charities. By being part of a self-regulatory regime, charities can shape the standards and norms of their sector and create opportunities to share best practice and to collaborate with other organisations.40 There is a distinction to be made between mandatory self-regulation, in which practices and standards are imposed on voluntary organisations by some third party (such as a donor, a funder or a contracting organisation) and voluntary self-regulation, in which organisations set the standards collectively with little external interference.41 Whether mandatory or voluntary, self-regulation runs the risk of being accused of regulatory capture – a situation where the organisations being regulated come to control the regulator and influence its operation in their own favour – and such accusations, whether real or otherwise, can damage faith in the regulatory system.42 This is why many countries have adopted state-controlled regulatory regimes for charitable status, with self-regulation often adopted for subsectors (such as international development charities) or particular activities (such as fundraising).43 35 M Gugerty, ‘Signaling Virtue: Voluntary Accountability Programs among Nonprofit Organizations’ (2009) 42 Policy Sciences 243; K AbouAssi and A Bies, ‘Relationships and Resources: The Isomorphism of Nonprofit Organizations’ Self-Regulation’ (2017) 20 Public Management Review 1581. 36 AbouAssi and Bies, ‘Relationships and Resources’ (2017) (n 35), 1583. 37 AbouAssi and Bies, ‘Relationships and Resources’ (2017) (n 35). 38 M Sidel, ‘The Promise and Limits of Collective Action for Nonprofit Self-Regulation: Evidence from Asia’ (2010) 39 Nonprofit and Voluntary Sector Quarterly 1039; AbouAssi and Bies, ‘Relationships and Resources’ (2017) (n 35). 39 AbouAssi and Bies, ‘Relationships and Resources’ (2017) (n 35). 40 M Sidel, ‘The Guardians Guarding Themselves: A Comparative Perspective on Nonprofit SelfRegulation’ (2005) 80 Chicago Kent Law Review 803; AbouAssi and Bies, ‘Relationships and Resources’ (2017) (n 35). 41 AbouAssi and Bies, ‘Relationships and Resources’ (2017) (n 35). 42 Gaffikin, Regulation as Accounting Theory (2005) (n 9). 43 Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4).

Licking their Own Lollipops  215 In England and Wales, the Charity Commission is an independent, state-funded body which operates autonomously from both government and the charities it regulates. There have, however, been attempts at self-regulation. Most notably, the Fundraising Standards Board (FRSB) was established in 2006 to regulate charity fundraising activities.44 The FRSB ruled on alleged breaches of fundraising practice against industry standards, with member organisations required to include its ‘blue tick’ logo on their fundraising materials.45 However, the regulatory regime was relatively short-lived, and in 2015, following a number of fundraising scandals, a review of fundraising regulation was undertaken, led by Sir Stuart Etherington, Chief Executive of the National Council for Voluntary Organisations. The review recommended that a single independent regulator be established, to work closely with existing regulatory bodies, including the Charity Commission for England and Wales and the Information Commissioner’s Office. As a result, the Fundraising Regulator for England and Wales was established as an independent body in January 2016,46 with the FRSB handing over its powers to investigate and sanction charities to this new, independent, body. The impression at least was that self-regulation had proved inadequate.

III.  What Do Charities Think? A.  Is Regulation in Charities’ Interests? This section looks at the attitudes of charities, or rather those who work for them, towards charity regulation. Unsurprisingly, according to the 2017 Populus survey, those who work in charities are rather more aware of the Charity Commission than the public as a whole, with 84 per cent of those who work in charities feeling that they know the regulator well.47 Public interest theory suggests that effective regulation should benefit charities as well as the public as a whole. Indeed, signing up to codes of good practice and engaging willingly in regulatory systems are a way, possibly the main way, in which charities can signal both as individual organisations and as a collective group that they are committed to effectively delivering their organisational mission.48 44 A Bies, ‘Evolution of Nonprofit Self-Regulation in Europe’ (2010) 39 Nonprofit and Voluntary Sector Quarterly 1057; OB Breen, ‘The Perks and Perils of Non-Statutory Fundraising Regulatory Regimes: An Anglo-Irish Perspective’ (2012) 23 Voluntas: International Journal of Voluntary and Nonprofit ­Organisations 763; A Hind, ‘New Development: Fundraising in UK Charities – Stepping Back from the Abyss’ (2017) 37 Public Money and Management 205; A Sargeant, J Hudson and D West, ‘Conceptualizing Brand Values in the Charity Sector: The Relationship between Sector, Cause and Organization’ (2008) 28 The Service Industries Journal 615. 45 Bies, ‘Evolution of Nonprofit Self-Regulation in Europe’ (2010) (n 44); Hind, ‘New Development’ (2017) (n 44). 46 Hind, ‘New Development’ (2017) (n 44). 47 Populus, ‘Trust and confidence in the Charity Commission’ (London, Charity Commission, 2017) 16. 48 A Prakash and M Gugerty, ‘Trust but Verify? Voluntary Regulation Programs in the Nonprofit Sector’ (2010) 4 Regulation and Governance 22.

216  Eddy Hogg That this would benefit charities is based on the assumption that charities value their own reputations and broader trust in charities as a whole.49 Yet complying with regulation also imposes demands on charities, and Cordery and Deguchi argue that regulation is only effective and efficient for charities when the costs of being regulated are outweighed by the benefits that charities receive from their regulation.50 Hyndman and McDonnell argue that the money that charities spend meeting regulatory requirements could often be better spent by charities on meeting their charitable objectives, and in such circumstances regulation imposes an unnecessary cost.51 Morris makes the same argument, concluding that: ‘[as] much as possible, the role of Government should be to facilitate and to help to develop capacity in this area, rather than to prescribe’.52 Research on this area has found a range of issues created by burdensome regulatory requirements. Burt and Taylor argue that regulation can ‘… have severely negative implications for the voluntary sector’.53 They list a number of issues, identified through research interviews with charity sector stakeholders in the UK, that charities face due to regulation. However, many of these are either extremely niche (eg, drug rehabilitation charities governed by statutory health regulation) or an (perhaps initial) overreaction to sensible regulation (eg, the need for disabled access or to comply with safeguarding requirements). Furthermore, few of their concerns relate specifically to charity regulation, but rather to broader regulation related to the fields in which charities operate. Nonetheless, just because these impositions of regulation may seem niche or short-term, this does not mean they aren’t real. Morgan found that following the imposition of more stringent funding requirements after the Charities Act 1993, a number of charities’ volunteer committee members and treasurers resigned their positions because they were unable, or unwilling, to cope with the new requirements.54 Research has found that small charities in particular struggle to meet regulatory demands, or even are unaware of them altogether.55 This chimes with the views of the public, who in the focus groups56 were clear that smaller charities should have less demanding regulatory requirements. In particular, the reliance on volunteers in the vast majority of small, local voluntary organisations means that regulation can place a burden on people who lack the time, resources and 49 SD Phillips, ‘Incrementalism at its best and worst: Regulatory reform and relational governance in Canada’ in SD Phillips and SR Smith (eds), Governance and Regulation in the Third Sector: International Perspectives (New York, Routledge, 2011). 50 Cordery and Deguchi, ‘Charity registration and reporting’ (2018) (n 11). 51 Hyndman and McDonnell, ‘Governance and Charities’ (2009) (n 12). 52 D Morris, ‘New Charity Regulation Proposals for England and Wales: Overdue or Overdone’ (2005) 80 Chicago-Kent Law Review 779, 800. 53 Burt and Taylor, ‘Striking the Regulatory Balance’ (2004) (n 2), 300. 54 G Morgan, The Use of Receipts and Payments Accounts for Financial Reporting by Smaller Charities. A Study Commissioned by the Association of Charity Independent Examiners (Sheffield, Sheffield Hallam University, 2008). 55 Burt and Taylor, ‘Striking the Regulatory Balance’ (2004) (n 2). 56 See n 5.

Licking their Own Lollipops  217 expertise to meet them. In such cases, the concern of focus group members may come true – smaller community groups will simply decide not to register as charities, concluding that the benefits they would receive are outweighed by the costs of taking part. If this picture seems pessimistic, it does not necessarily need to be. New regulations often do place a significant cost on charities, particularly when they come with stringent requirements around financial reporting. However, as charities become more familiar with the regulations these costs will diminish and if the regulatory regime is effective, they should also enjoy benefits associated with a rise in trust and confidence in charities.57 Many of the complaints regarding regulation found in the existing research are either niche or to do with an unwillingness of organisations and those who run them to adapt to new regulatory requirements. In theory and in practice, regulation does benefit charities as well as wider society. This section goes on to explore how it does so, and what those who work for charities would like regulation to look like.

B.  Do those Who Work in Charities Feel that Regulation is Effective? Much like the public attitudes towards charity regulation, there has been little academic or charity sector research into what those who work in charities feel about how they are regulated. The Populus research found that those who work in charities generally feel that the current levels of regulation are about right.58 Over half of those who work in charities (55 per cent) agree that the current levels of regulation are the right amount, compared to 16 per cent who feel there is currently too little and just 7 per cent who feel there is currently too much. This suggests that the current regulatory requirements imposed by the Charity Commission in England and Wales are about right, and certainly are not imposing overly onerous demands on charities. Given that the Populus survey covers people who work in a range of charity roles, including those who have more and less responsibility for ensuring compliance with regulatory requirements, it is noteworthy that a person’s role within a charity does not seem to have much impact on their perceptions of dealing with the Charity Commission. The overall average rating across four different charity roles is 7.1 out of 10, with chairs and trustees rating it at 7.2, chief executives at 7.0 and senior management at 6.8.59 It is dangerous though, to represent charity employees and trustees as a homogenous group of stakeholders. Morgan and Fletcher found that public



57 Cordery

58 Populus, 59 Ibid.

and Deguchi, ‘Charity registration and reporting’ (2018) (n 11). Trust and Confidence in the Charity Commission (London, Charity Commission, 2017).

218  Eddy Hogg benefit reporting, one particular aspect of regulation in England and Wales, had been a valuable process for some charities but a testing one for others.60 For the former group, representatives felt that it enabled their trustees and senior staff to reflect on the extent to which the charity was delivering its core aims. However, the same study found that representatives of (often smaller) charities have found public benefit reporting very onerous and resource-intensive, diverting effect and resource away from other areas of the charity’s work. This supports the argument outlined in the previous section – ie that regulation offers both benefits and costs to charities, particularly in the short term, which impacts on their perception of the necessity and effectiveness of regulation.

C.  What should Regulation Look Like? In terms of what regulation should entail, those who work in charities broadly agree with the Populus survey findings for the general public. Just like the public, charity staff see the most important role of the regulator to be ensuring that charities are transparent and accountable, with 88 per cent seeing this as very important.61 Other important roles are ranked by charity staff in the same order as by the public: that the regulator takes action to protect charities from misuse (84 per cent), that it acts with authority and expertise (84 per cent), that it supports trustees (84 per cent) and that it manages expectations about what it can deal with (67 per cent). Charity employees are more satisfied than the general public that the Commission is delivering on these areas, with scores ranging between 7.1 and 7.8 out of 10.62 However, with the public we found in the focus groups that they were more likely to see the role of the charity regulator as being to support charities and were concerned about the impact of onerous regulations on smaller organisations. It is possible that, just as the Populus research missed the nuance in the public’s views on what charity regulation should entail, so it is missing the nuance in what those who work in charities think. There are some potential elements of regulation that those who work in charities are resistant to because they are concerned about the impact that it could have on their work and on perceptions of their work. Connolly and Hyndman note that the regulation of spending ratios – the proportion of charity spending that is spent on administration versus the proportion spent on frontline activities – is met with unease by charities.63 Indeed, the Charity Finance Directors’ Group argued in 2003 that the use of these ratios in public information about the work of charities could lead to misconceptions about charity inefficiency based on issues



60 Morgan

61 Populus 62 Ibid.

and Fletcher (2013), ‘Mandatory Public Benefit Reporting’ (2013) (n 33). Trust and Confidence in the Charity Commission (2017) (n 58).

63 Connolly

and Hyndman, ‘Towards Charity Accountability’ (2013) (n 11).

Licking their Own Lollipops  219 of ­definition and interpretation.64 Such was the resistance from those working in charities that the plan to include information on this ratio in charities’ statement of recommended practice (SORP) was dropped by the Charity Commission. This is important, because badly designed regulation can have consequences for charities. Desai and Yetman find that the requirements for charities in the US to return detailed financial information results in charities paying their staff less to spend more on their beneficiaries.65 Paying staff less may result in less able or less experienced staff being hired who will not run the organisation as effectively.66 It is likely that were regulators to produce similar ratings of charities to those produced by third party organisations such as Charity Navigator in the US, some charities would suffer as their complex work is reduced to a number and a ranking. The result may be that charities devote more resources to ensuring they perform well in such ranking systems, diverting these resources away from their beneficiaries.67 Other research has found that those who work in smaller charities often indicate their views on what regulation should entail by simply not complying with certain elements of regulation. Trustees in many smaller charities simply ignore elements of reporting requirements that they deem to be unnecessary or not worth the effort to undertake.68 This precedent may be dangerous; a study conducted in Belgium by Verbruggen et al found that charities are often inclined to follow the crowd, behaving in similar ways to other organisations – if some do not comply with elements of regulation, others will follow.69 In terms of whose role it is to ensure that charities comply with regulatory requirements, Stone and Ostrower are clear that ultimate responsibility rests with charities’ trustees.70 The Populus survey suggests that those who work in charities agree with this view. Charity employees – whatever their role – feel that the most important group in ensuring the charity complies with the law is trustees, with 72 per cent feeling that they are the most responsible for compliance.71 However, responsibility may be delegated to less senior staff or volunteers when the trustees see a particular element of regulation to be unnecessary, something that Morgan 64 Ibid. 65 A Desai and RJ Yetman, ‘Constraining Managers Without Owners: Governance of the Notfor-Profit Enterprise’ (2005) National Bureau of Economic Research (NBER) Working Paper Series, No 11140 (www.nber.org/papers/w11140). 66 Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4). 67 Sloan, ‘The Effects of Nonprofit Accountability Ratings on Donor Behavior’ (2009) (n 1); R Szper and A Prakash, ‘Charity Watchdogs and the Limits of Information-Based Regulation’ (2011) 22 ­Voluntas: International Journal of Voluntary and Nonprofit Organizations 112; R Szper, ‘Playing to the Test: Organizational Responses to Third Party Ratings’ (2013) 24 Voluntas: International Journal of ­Voluntary and Nonprofit Organizations 935. 68 Morgan and Fletcher, ‘Mandatory Public Benefit Reporting’ (2013) (n 33). 69 S Verbruggen, J Christiaens and K Milis, ‘Can Resource Dependence and Coercive Isomorphism Explain Nonprofit Organizations’ Compliance with Reporting Standards?’ (2011) 40 Nonprofit and Voluntary Sector Quarterly 5. 70 M Stone and F Ostrower ‘Acting in the Public Interest? Another Look at Research on Nonprofit Governance’ (2007) 36 Nonprofit and Voluntary Sector Quarterly 416. 71 Populus, Trust and Confidence in the Charity Commission (2017) (n 58).

220  Eddy Hogg and Fletcher find in their study of charities’ completion of the public benefit reporting element of their annual reporting to the Charity Commission.72 Only 21  per  cent think that the Charity Commission has the most responsibility for ensuring legal compliance, but 39 per cent feel it is the second most important and 30 per cent the third most important.73 This section has reflected on the relatively limited amount of academic work that looks at the attitudes of those who work in charities to their regulation. It has argued that charities are only like to support regulation when the cost of complying with the regulation is less than the perceived benefit that being regulated delivers. While there is little research on what charities think regulation should entail, a number of pieces of work have explored charity compliance in different elements of regulatory reporting. Where compliance is patchy or where charities have argued against certain elements being included in regulatory requirements, we can assume that this reflects a feeling that such regulatory requirements pose greater costs to charities than they provide benefits.

IV.  What Do Members of the Public Think? A.  A Note of Caution Public interest theory, as the name suggests, rests on the idea that effective regulation is in the interest of the public. It should protect and benefit the public, both those who donate their time and money to charities and those who benefit from charitable support.74 As such, understanding people’s views of charity r­ egulation – what it should look like and how it should be organised – is fundamental to understanding how regulation can best serve to meet this public interest. We do not have a hugely well-advanced understanding of public attitudes to the voluntary sector, and in particular we do not know a great deal at all about public attitudes to charity regulation.75 In England and Wales, we have to be extremely cautious with research about charity regulation, as we also know that the public know very little about it – the 2017 Populus study finds that 52 per cent of people have heard of the Charity Commission,76 while the author’s 2018 study found even less awareness.77 The Populus research found that 38 per cent of people felt that 72 Morgan and Fletcher, ‘Mandatory Public Benefit Reporting’ (2013) (n 33). 73 Populus, Trust and Confidence in the Charity Commission (2017) (n 58). 74 Cordery and Deguchi, ‘Charity registration and reporting’ (2018) (n 11). 75 M Schlesinger, S Mitchell and BH Gray, ‘Restoring Public Legitimacy to the Nonprofit Sector: A Survey Experiment Using Descriptions of Nonprofit Ownership’ (2004) 33 Nonprofit and Voluntary Sector Quarterly 673; L McDougle and M Lam, ‘Individual- and Community-Level Determinants of Public Attitudes toward Nonprofit Organizations’ (2014) 43 Nonprofit and Voluntary Sector Quarterly 672. 76 Populus, Trust and Confidence in the Charity Commission (2017) (n 58). 77 Hogg, ‘What Regulation, Who Pays?’ (2018) (n 6).

Licking their Own Lollipops  221 they know the Charity Commission well, compared to 71 per cent of OFSTED (the education regulator), 63 per cent for the Food Standards Agency and 54 per cent for OFCOM (the media regulator).78 Although the day-to-day workings of the Charity Commission are unknown to most, the presence of effective charity regulation is seen as important – the public do see charity regulation as being a good and necessary thing.79 While a survey, such as that carried out by Populus, gives us a broad-brush picture of public attitudes towards charities and their regulation, qualitative approaches reveal the nuance in public opinion. This is expressed clearly by focus group member Natalie, who in discussing charity regulation commented: I think on the surface it all makes sense and it all looks very nice but when you actually get down to the nitty gritty of it, it’s actually a very, very, very complicated issue. (Natalie, focus group participant)

Natalie is of course right – the regulation of charities is complicated! While the 2017 Populus survey80 found that over half of people are aware of the Charity Commission, awareness of what regulation entails – the ‘nitty gritty’ of it – would seem to be far less common. The most well-known element of regulation would seem to be the charity numbers that all registered charities in England and Wales are given, as Lee explains: I think the thing that I know in terms of regulation is that, again which is not much, is that each charity generally has a charity number so sort of like a little serial number so they’ve got to be registered with some kind of government body, so my assumption is that by having that status they are kind of registered or regulated. (Lee, focus group participant)

Other participants mentioned Gift Aid and other tax exemptions as examples of what charity regulation entailed, but on the whole knowledge was very limited. We therefore need to be cautious about public views on charity regulation. It is not the intention of this chapter to explore whether better regulation equals more trust equals more giving. Rather it is to explore public attitudes to regulation in terms of its effectiveness and how it can best be organised. Further to this, we also need to be cautious about public attitudes on how competent the charity regulator is, given that the Populus survey81 finds a clear relationship between how well a regulator is known and how effective it is perceived to be by the public. This suggests that perceptions of regulatory competence are more based on simple awareness of its existence than any detailed understanding of how it goes about regulating.



78 Populus,

Trust and Confidence in the Charity Commission (2017) (n 58). ‘What Regulation, Who Pays?’ (2018) (n 6). 80 Populus, Trust and Confidence in the Charity Commission (2017) (n 58). 81 Populus, Trust and Confidence in the Charity Commission (2017) (n 58). 79 Hogg,

222  Eddy Hogg

B.  What Do Members of the Public Think the Charity Commission Does? A major part of the argument for regulating charities, put forward by public interest theory and indeed the stated purpose of the Charity Commission for England and Wales, is to improve public trust in individual charities and in the sector as a whole. A large number of pieces of work have argued that this increase in individual and/or collective trust should lead to increased levels of charitable giving. Williams, Bekkers and Morris all argue for this positive relationship between trust and giving,82 with Gordon and Khumawala and Sinclair et al adding that effective regulation and the provision of charities’ financial data can contribute to building this trust.83 Hyndman and McDonnell summarise this perceived relationship as follows: If people believe the government is supervising the charity sector effectively, they will view the potential for opportunism on the part of charity workers to be reduced. As this will increase the confidence of donors that their donation will go to their intended beneficiary, the level of donation should increase.84

Regulation, it is argued, will reduce information asymmetries and allow people to make more informed choices about whether to donate and what to donate to. However, often people are unaware of how they can access information about charities or do not have the time or inclination to look for it. This focus group discussion illustrates the former: Chris: The Charities Commission sort of regulate the charities but I’m not too sure they look at things like the finances, you know, whether they make companies submit an annual financial return. Grant: I’m aware that they’ve got to submit a financial return and you can check the expenditure and spreadsheets of a charity through the Charities Commission website and in the past when I’ve been considering giving to a charity I’ve often looked at that. Charlotte: I’m sorry but then who can check it? Grant: Anyone. So you could check it. (Focus group participants)

Even with clear information readily available thanks to regulatory requirements, people will often base their perceptions of charity trustworthiness on proxies and

82 D Williams, ‘Regulating the Accountability of Charitable Institutions’ (1984) 24 Accounting and Finance 1; Bekkers ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) (n 24); Morris, ‘New Charity Regulation Proposals (2005) (n 52). 83 T Gordon and S Khumawala, ‘The Demand for Not-for-Profit Financial Statements: A Model of Individual Giving’ (1999) 18 Journal of Accounting Literature 31; R Sinclair, D Northcott and K Hooper, ‘Can Sector-Specific Standards Enhance the Comparability of Third Sector Organisations’ Financial Statements?’ (2014) 20 Third Sector Review 27. 84 Hyndman and McDonnell, ‘Governance and Charities’ (2009) (n 12), 14.

Licking their Own Lollipops  223 signaling mechanisms.85 Charity numbers in England and Wales, as highlighted in the previous section, are one such proxy. Another such proxy that regulators can provide is a logo or ‘accreditation seal’ which signifies to potential donors that a charity has complied with their regulatory requirements. Bekkers looks at the introduction of a fundraising accreditation seal in the Netherlands.86 He finds that people who are aware of the seal of the new accreditation agency are likely to give significantly larger sums of money to charity. However, we need to be careful with this finding, as there are a couple of mechanisms that could be driving it, which would not necessarily prove that knowledge of the seal makes people give more. Firstly, Bekkers notes that older and more educated people are more likely to be aware of the regulator’s seal – these groups are also more likely to donate to charity and are likely to be in a position to donate larger sums. Secondly, it could be that donors only become aware of the regulator’s seal once they donate, making donor awareness self-fulfilling. We have to be very careful with how we consider the relationship between regulation, trust and charitable giving. While the Populus survey finds a positive relationship between trust and stated donation behaviour,87 this may be driven by the same causal mechanisms identified in Bekkers88 as much as they demonstrate a relationship between trust and giving.

C.  Do Members of the Public Think Regulation is Effective? There is very little existing research on whether people feel that the existing regulation of charities is effective, with most of what currently exists coming either from surveys undertaken by either voluntary sector organisations or the Charity Commission itself. The most recent Populus research found that 83 per cent of the public consider the Charity Commission’s role to be either essential or very important, with 45 per cent of people trusting charities more because they know that they are regulated.89 The proportion of people who think charities are regulated either very effectively or fairly effectively was 66 per cent in 2016, falling to 56 per cent in 2017 and 55 per cent in 2018.90 It is not clear what is behind this fall, or indeed whether we should read too much into such a decline. It is maybe the case that public discontent has led to the fall, with infrastructure charity nfpSynergy finding in autumn 2015 (so immediately after the death of Olive Cooke) that 76 per cent 85 Bekkers, ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) (n 24); B Breeze, ‘How  Donors Choose Charities: The Role of Personal Taste and Experiences in Giving Decisions’ (2013) 4 Voluntary Sector Review 165. 86 Bekkers, ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) (n 24). 87 Populus, Trust in Charities (London, Charity Commission, 2018). 88 Bekkers, ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) (n 24). 89 Populus, Trust in Charities (2018) (n 87). 90 Populus, Trust and Confidence in the Charity Commission (2017) (n 58); Trust in Charities (2018) (n 87).

224  Eddy Hogg of British adults wanted to see charity fundraising regulated more tightly and that 71 per cent felt tighter regulation was required, even if it meant charities raised less money.91 Back to charity regulation more broadly, just 6 per cent of people think that there is too much charity regulation, compared to 32 per cent who think there is too little. However, the largest group, 41 per cent of respondents feel that current regulation levels are the right amount.92 The focus group research allows us to explore perceptions of regulatory effectiveness in more detail. In general, people are fairly positive about what charities do and are confident that the current regulatory regime is effective, as this quote from Aaron suggests: Your expectation that when you give to charities that that money’s spent correctly. (Aaron, focus group participant)

Other participants discussed the role that regulation plays in this, as this discussion shows: Natalie: I’m not concerned because I think charities do do a good job … Mary: I think the majority are regulated but, as you say, it could be some don’t listen so they’re not necessarily regulated charities. Natalie: And all their information is public, so you can generally see where it’s going – that’s the main thing. But I mean like the bogus ones, you should be able to ask for a charity number in theory and check who they are. (Focus group participants)

Generally speaking, focus group participants were positive about the trustworthiness of charities, and even though they were not entirely clear in their understanding of the role that regulation plays in maintaining this trustworthiness, they were happy that regulation existed. Consider the analogy of a car’s brakes: most people do not know how their brakes work – I certainly do not – but they are very happy that they do. Focus group participants were absolutely clear that charity regulation is necessary in order to protect donors and beneficiaries, as this discussion illustrates: Emma: I think, well, some policing is obviously getting independent people to police you … Ryan: You don’t think the Charity Commission is already telling them to do that? Emma: I don’t know. To be honest I don’t really know what the Charity Commission is doing. Ryan: I would have thought the Charity Commission would want to see these accounts every year.

91 T Harrison et al, MPs’ Reactions to Fundraising Media Coverage of Summer 2015 (London, nfPSynergy, 2015). 92 Populus, Trust and Confidence in the Charity Commission (2017) (n 58).

Licking their Own Lollipops  225 Emma: Well that’s only when it’s big numbers. When it’s a small amount … Ryan: I don’t know what the … Emma: Yeah. (Focus group participants)

Other focus group participants drew comparisons with other sectors to outline why they saw charity regulation as being important, as Lee outlines: For me, one word: confidence. It’s just you have confidence in the system … I have confidence that there is some kind of comeback or there’s some kind of protection. (Lee, focus group participant)

People are therefore clear that regulation is necessary even if they do not know, or even wish to know, what it entails. This is consistent with public interest theory – the idea that regulation ensures that people can take it on trust that charities are effectively regulated and that this trust can inform their decisions on whether, and how, to support charities.

D.  What Do Members of the Public Think Regulation should Look Like? When people make the decision to donate to charity, they do so because they want the cause they are giving to – whatever it is – to benefit and to thrive.93 To deliver these benefits, donors want their financial gifts to be used effectively.94 This means that when donors are deciding which charity to give to, one of the factors they consider is the perceived performance of the charitable organisations that they are considering.95 Donors are more inclined, unsurprisingly, to give to charities that have a reputation for being efficient and well run,96 albeit often using proxies on which to base their perceptions of efficiency. Given regulation and its symbols – a charity number, a logo, and so on – are a widely understood proxy, it follows that those who use these proxies will have 93 R Bekkers and P Wiepking, ‘A Literature Review of Empirical Studies of Philanthropy: Eight Mechanisms that Drive Charitable Giving’ (2011) 40 Nonprofit and Voluntary Sector Quarterly 924; B Duncan, ‘A Theory of Impact Philanthropy’ (2004) 88 Journal of Public Economics 2159. 94 C Furneaux and W Wymer, ‘Public Trust in Australian Charities: Accounting for Cause and Effect’ (2015) 21 Third Sector Review 99. 95 K Gaskin, ‘Blurred Vision: Public Trust in Charities’ (1999) 4 International Journal of Nonprofit and Voluntary Sector Marketing 163; A Sargeant and E Jay, Fundraising Management Analysis, Planning and Practice (London, Routledge, 2010). 96 Bekkers, ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) (n 24); A Beldad, B  Snip and J van Hoof, ‘Generosity the Second Time Around: Determinants of Individuals’ Repeat Donation Intention’ (2014) 43 Nonprofit and Voluntary Sector Quarterly 144; Breeze, ‘How Donors Choose Charities’ (2010) (n 85); Furneaux & Wymer, ‘Public Trust in Australian Charities’ (2015) (n 94); M Meijer, ‘The Effects of Charity Reputation on Charitable Giving’ (2009) 12 Corporate Reputation Review 33.

226  Eddy Hogg a view about what regulation should entail. The Populus research bears this out: people were asked what information made them trust charities more and more likely to donate. Having the name and logo of the regulator made 49 per cent of people trust that charity more, and 25 per cent of people stated that they were more likely to donate as a result. However, the impact of this proxy was lower than where a short statement of the impact that the charity has97 was included (53 per cent more trusting, 28 per cent more likely to donate) or where a small pie chart of spending was included (62 per cent more trusting and 38 per cent more likely to donate).98 The Populus research found widespread support that the most important role of the regulator was to ensure that charities are transparent and accountable, with 92 per cent of respondents seeing this as very important.99 Also perceived as important is that the regulator takes action to protect charities from misuse (90  per  cent), acts with authority and expertise (87 per cent), supports trustees (83 per cent), and manages expectations about what it can deal with (70 per cent).100 While these enforcement-type functions were discussed in the focus groups, they generally did not form the main part of the discussions. Instead, participants were keen to emphasise that a central role of charity regulation should be the provision of guidance to existing charities and those wanting to start new charities, as this discussion suggests: Paul: Well, a regulator regulates the industry. It sets down the parameters within which that industry operates, so to start up in that industry they would have to find … they would have to know what those guidelines were, wouldn’t they, and how to actually achieve those guidelines in order to be a charity. So I think that’s … Charlotte: They should have some kind of guidelines for a person who would be interested to actually set up a charitable organisation should they want to, therefore they’d know what to do thereafter once they’ve set up as a charitable organisation. (Focus group participants)

This point was also made in other focus groups, as Aaron outlines: I think the regulators can give guidance as well because if you’re starting up on your own and you don’t know, the regulator says or actually tells you what you should be doing so you know you’re correct. If you haven’t got that regulator helping you then really you could be doing things wrong like somebody said and you wouldn’t realise. (Aaron, focus group participant)

The Charity Commission for England and Wales has seen its budget cut considerably in recent years, and as a result has seen its ability to provide proactive 97 In this case, the impact statement included for the made-up St Annabel’s Hospice, was ‘We give chronically and terminally ill patients the care they need. Last year, our nurses and care workers helped 712 patients and home and 346 patients in our care wards’. 98 Populus, Trust in Charities (2018) (n 87). 99 Populus, Trust and Confidence in the Charity Commission (2017) (n 58). 100 Ibid.

Licking their Own Lollipops  227 guidance significantly constrained. Instead it has had to focus its work on responding to complaints and reports of charity malpractice, and increasingly has had a specific mandate to investigate the misuse of charitable donations for the funding of t­ errorist activities overseas. In Part II (A) of this chapter, we identified that it is important that regulation does not place too large a burden on charities.101 When discussing the reporting requirements that regulation imposes on charities, participants at all of the focus groups were clear that these should be less onerous on smaller charities, as indeed they are. Craig argued that regulation that made too many demands on charities might prevent people from setting up smaller charities: I think that it depends on the scale of the charity. I mean, if you’ve got big charities and they obviously employ staff then they should be regulated, but if you’re a small individual wanting to get something off the ground, then that could put you off from starting if you’ve got a lot of regulations to follow and forms … if you’re faced with all these things and they might actually stop you from doing it. (Craig, focus group participant)

This point was also made by Paul, who argued that: If we start to get too officious with these things – I’m not saying that we shouldn’t have regulations – but if the regulations are too severe, people won’t start local charities. (Paul, focus group participant)

Differentiation, such as the requirement in England and Wales that charities with incomes of under £250,000 need only to submit simplified accounts to the Charity Commission, are clearly popular with the public. Linked to the need for tiers of regulation to ensure that an unnecessary strain is not placed on smaller charities, participants were also keen that regulatory requirements were proportionate and cost-effective across the board, as George explored: Well, I should think everyone would like to see efficiency increase. I suppose the question is: would the cost of having an oversight over efficiency proved to be cost-effective? (George, focus group participant)

In these focus group discussions of what regulation should look like, then, we find a significant degree of nuance. In particular, we find far more support for the regulator as a source of guidance than is found in the more broad-brush qualitative research. In particular, we see a distinction between larger and smaller charities, the different needs they have and the different requirements which should be placed upon them. In sum, people would like regulators to be supportive, proportionate, and cost-effective. 101 Bekkers, ‘Trust, Accreditation and Philanthropy in the Netherlands’ (2003) (n 24); Burt and Taylor, ‘Striking the Regulatory Balance’ (2004) (n 2); Irvin, ‘State Regulation of Nonprofit Organizations’ (2005) (n 20); Corry, ‘Defining and Theorising the Third Sector’ (2010) (n 23); Cordery, ‘Regulating Small and Medium Charities’ (2013) (n 4).

228  Eddy Hogg

E.  Who Do Members of the Public Think should Regulate? In Part II (C) of this chapter, we looked at the differences between self-regulation of charities and regulation imposed and organised by the state. Such decisions have both practical and symbolic importance to how regulation operates and how it is perceived by the public.102 In practical terms, the way that charity regulation is organised has a clear impact on how it operates and what it sets out to, and is able to, achieve. But there is also a symbolic importance to how regulation is organised, with self-regulation, government-imposed regulation and all of the shades of grey in between communicating their own messages to the public about the way in which regulation is taken seriously by government and charities. The focus groups found mixed views on how regulation should be organised and whether the state or charities themselves should be the main driving force behind charity regulation, as this exchange illustrates: Craig: I think the Charity Commission should be composed of people who work in charities … that’s the way I looked at it. Aaron: I’m not so sure that that in reality would be the best way of doing it in my opinion because if you have charities auditing charities, there’s going to be bias creep in … if you’ve got somebody totally independent and you removed the names of the charities off the list so that you don’t know what the charity is, you can actually properly look at their accounts without having any bias whatsoever. I work in HR. We’ve now stopped taking names on CVs because it removes any kind of personal bias. We could do the same like that for charities; remove the name and you don’t know what the charity is. Natalie: I think that’s an excellent idea. Craig: But, you know, for the people who work in charities know the loopholes and they would be better at spotting possibly … Natalie: This is why I think that it’s better to have both because someone who isn’t part of the charity can look at it with a sensible mind and no emotional attachment to any of them because they’re not part of any of them but they do also need people from a number of charities or a charity experience – not necessarily to work in there – to be able to say, “Look, I know mathematically this makes sense but realistically having been in that environment or been in that environment it’s not going to work like that”. (Focus group participants)

While this discussion suggests a desire for a regulator staffed (and presumably therefore organised) by both charity sector professionals and independent actors, other focus group participants were concerned that self-regulation, or even a system whereby charities had a significant role to play in their own regulation, would run the risk of regulatory capture. The following exchange shows how participants outlined this view: Craig: And what’s it got to do with the government anyway? I mean who you give your money to should be between you and the charity and you want to find out where your

102 Hogg,

‘What Regulation, Who Pays?’ (2018) (n 6).

Licking their Own Lollipops  229 money’s going so the charity should be obliged to find out or give you that information via a auditing process but why does it have to involve the government? George: I think that historically – I’m trying to think of some examples, but I can’t – but bodies who attempted to self-regulate have often fallen into difficulties. You need an external sort of influence to make sure that you’re being entirely objective. (Focus group participants)

Other participants too highlighted the importance of independence, drawing comparisons with the Office for Budget Responsibility to illustrate the importance of independent oversight: Grant: I don’t think it’s necessarily a problem with government regulating because look at the Office for Budgetary Responsibility which this government started and they will come out with statistics that embarrass the government so there can be independence if it’s done correctly. Paul: I think ‘independence’ is the key word, isn’t it? Chris: Yeah, essentially, yeah. (Focus group participants)

Perceived practical and symbolic independence on the part of the regulator will ensure that it is seen as an impartial arbiter of charities and avoid the perception that, as Hugh puts it, puts it, ‘the charities will be licking their own lollipops’. As he went on to explain: You want them to have some kind of oversight from somebody who is independent from the charities themselves. (Hugh, focus group participant)

This section has explored public attitudes to charity regulation. It is important to maintain a healthy amount of caution regarding public attitudes to something that few people have more than a passing knowledge of or interest in. Nonetheless, it is clear that while people do not necessarily understand how charities are regulated beyond recognising some key signals – charity numbers, logos, etc – they nonetheless feel it is important that charities are regulated, consistent with public interest theory. Additionally, we need to be careful to avoid the broad-brush conclusions that surveys such as those carried out by Populus annually on behalf of the Charity Commission point towards. Such surveys would suggest that the public demand a robust regulator enforcing a strict code of charity conduct, whereas the focus group data explored here suggests that people feel that the regulator should also offer advice and support for charities and should not place an onerous regulatory burden on them. To do this, in general people support the idea of an independent charity regulator, with independence the key factor. This is broadly consistent with the limited existing literature on public attitudes towards charity and the even smaller existing literature on public attitudes to charity regulation. It lends support to the application of public interest theory to the regulation of charities and shows that, while not articulated as such, regulatory

230  Eddy Hogg capture – whereby charities come to determine the priorities of a notionally independent regulator – is a real concern when it comes to public attitudes towards regulation.

V.  Conclusion: Should this Matter? Public interest theory, the rationale that underpins the rationale for regulating charitable organisations, argues that regulation is in the interests of both the public as a whole – donors, volunteers, beneficiaries and wider society – and the organisations being regulated. Yet while the theory behind charity regulation and the mechanics of how it operates have been researched across a range of national contexts, the voices of both those who work in charities and the public are clearly important in understanding the importance of charity regulation in practice, what it should entail and how it should be organised. Much of what we do know about these attitudes to charity regulation comes from survey data, such as that gathered annually for Populus on behalf of the Charity Commission in England and Wales. Whilst this data provides us with a broad picture of attitudes to regulation, it misses the nuances in people’s attitudes, such as the distinctions between large and small charities or the ways in which the public see the role of the regulator as being not just as an enforcer of rules but also as an advisor to encourage and support good governance of charities. In order for charity regulation to deliver the positive outcomes public interest theory suggests it will, this detailed understanding of what those who work in charities and the public that supports and benefit from them want charity regulation to look like is important. This chapter has explored how, when discussing the nature of charity regulation in a focus group environment, people are far more inclined towards feeling that the regulator should be a supportive friend to charities and one that should not place too significant a regulatory burden on smaller charities in particular. Public views on how regulation should be organised were also similarly nuanced, with some clear arguments against self-regulation – and allowing charities to ‘lick their own lollipops’ – gaining support from other focus group members. It is likely that were similar research to be done on charity workers, we would find nuance here too. Future research should seek to find this nuance; to understand the complexity of attitudes to charity regulation. Even though people generally do not have the time or inclination to look too deeply into how charities are regulated, the public and those who work in the sector are clear that charities should be regulated. Future research should explore why, and what people feel regulation should entail, in more detail. Doing so will help to shape regulation to ensure that it delivers the public interest while supporting charities to be as efficient and effective as possible in delivering their mission.

11 Commissioning of Services by Charities in the Third Decade of the Contract Culture: Lessons Learned (or Not Yet) DEBRA MORRIS1

I. Introduction The question for debate in this chapter is whether Payment by Results (PbR) contracts in general, and, in particular, the use of Social Impact Bonds (SIBs), are an effective means by which charities might be funded to deliver public services. Such payment mechanisms are becoming increasingly common methods to fund charities and other public service providers. Whilst charities might be best placed to deliver certain services, the debate will be framed by arguing that inherent risks of PbR contracts present significant challenges for them. The problems identified are particularly acute for smaller charities, which make up the vast majority of the charitable sector. There will be a critical assessment of potential solutions intended to overcome those challenges, together with analysis of the results of various studies of their use. These suggest that a number of those potentially alleviating measures do not resolve the difficulties that largely remain in place. Discussion of the debate question will conclude that, whilst charities are regarded as important players in the delivery of public services,2 the PbR funding environment may well prohibit their participation. Whilst this chapter focuses on the UK, which has been a pioneer in this area (in developing the first SIB in the world), similar payment structures are growing in popularity across the globe and are particularly prevalent in Australia and the US. 1 I would like to thank both the editors and the anonymous reviewer for their helpful comments. Any errors are my own. 2 See, eg, Cabinet Office, Civil Society Strategy: building a future that works for everyone, (HM Government, August 2018). This sets out the steps that government will take to support a framework of collaborative commissioning, so as to create a more diverse marketplace of suppliers. See also speech by the Minister for the Cabinet Office, David Lidington, which preceded the publication of the strategy: David Lidington, ‘Chancellor of the Duchy of Lancaster speech to Reform’ (Speech at Reform, 25 June 2018) www.gov.uk/government/speeches/chancellor-of-the-duchy-of-lancaster-speech-to-reform.

232  Debra Morris By way of background, the 1990s saw a marked shift in the UK from state funding for charities through grants, to the awarding of contracts in exchange for the provision of services. This phenomenon was coined the ‘contract culture’ and it brought many problems in its wake, particularly for smaller charities.3 Early empirical research by the author revealed that contract funding relationships in practice bore little relevance to theoretical legal analysis of those contracts.4 Furthermore, the contracts often created legal risks to charities of which the ­trustees were unaware, as well as threats to charitable independence.5 Since that time, the trend towards service delivery by charities under contract in the UK and elsewhere has continued and gathered pace. The 2019 Civil Society Almanac from National Council for Voluntary Organisations (NCVO) reports that, in the UK, by 2016–17, the sector received £15.8 billion (31 per cent of its total income) from government bodies, and the social services subsector continues to receive the ­largest proportion of income from government (45 per cent).6 Data produced for the 2018 almanac reported that 74 per cent of government income for charities was earned through contracts or fees.7 As we conclude the third decade of this changed funding environment for charities, this chapter will analyse remaining challenges faced by contracting charities. Whilst some legal changes have been positive (for example, the creation of a new legal form for charities, more suited to entering into contractual ­relationships8), changes in public policy and contract provisions have brought additional challenges. It will be seen that the growing influence of market incentives and commercial principles in social welfare provision are crucial factors affecting charities. In addition, austerity measures in place since 2010 led to unprecedented cuts in public expenditure and increased funding pressures on charities delivering front-line public services. This is at the same time that charities’ services are in more demand. Contracts with PbR clauses present particular problems for charities and are the focus of this debate. Whilst charities can often be best placed to deliver the desired outcomes, the use of PbR funding models may well exclude them from the market. It will be seen that these contracts are simply too risky for charities. The level of financial risk and the amount of up-front capital required in such a 3 See, eg, D Morris, ‘Charities in the Contract Culture: Survival of the Largest?’ [2000] Legal Studies 409. 4 D Morris, Charities and the Contract Culture: Partners or Contractors? Law and Practice in Conflict (Charity Law Unit, 1999). 5 See, eg, D Morris and K Atkinson, ‘Charities biting the hand that feeds: relationships with their funders’ in D Morris and J Warburton (eds), Charities, Governance and the Law: The Way Forward (London, Keyhaven, 2003). 6 O Chan et al, The UK Civil Society Almanac 2019 (NCVO, 2019). 7 C Benard et al, The UK Civil Society Almanac 2018 (NCVO, 2018). 8 The Charitable Incorporated Organisation (CIO) is a new legal structure available for charities that wish to be incorporated. The structure was designed specifically for charities, allowing them to register just once with the Charity Commission as an incorporated form of charity which is not a company. See, in general, Charities Act 2011, pt 11.

Commissioning of Services by Charities in the Third Decade  233 model will therefore inhibit the participation of charities. Many are choosing to withdraw from this funding environment, offered by commissioners on a ‘take it or leave it’ basis. Those charities that do participate often pull out once the full level of risk is appreciated. For example, St Mungo’s, a large homelessness charity, is one of a number of specialist voluntary sector organisations that withdrew from the Work Programme, which we will see was funded through PbR contracts.9 PbR contracts may even contribute to the downfall of organisations, such as Eco-Actif Services, a small social enterprise in Surrey that helped find work for the hardest to employ, which was one of at least four organisations that closed in 2012, citing their Work Programme contracts as a major reason in their collapse.10 More recently, the final annual report of a legal advice charity, Advising Communities, referred to the fact that it was ‘managing an increasingly complicated payment on results environment’, before a later announcement that the charity was being placed into liquidation.11 Finally, the collapse in June 2017 of the Lifeline Project – a drug and alcohol charity with 1,300 employees that had served 80,000 people a year – has been directly linked by its administrators to three PbR contracts with different local authorities between August 2015 and January 2016, entered into ‘without undertaking the necessary due diligence and [failing] to realise that the targets set were unachievable’.12 These examples of charities and other third sector organisations, with the skills and experience necessary to solve current social problems, either withdrawing from the provision of service or ceasing to exist due to the funding environment, raise significant policy issues. Smaller, newer charities, that may nevertheless have the appropriate specialist expertise to provide public services, are often excluded from the market entirely.13 Not only do charities miss out on the opportunity to participate in the delivery of welfare services, but would-be beneficiaries are deprived of the potentially innovative capacity14 of the charitable sector. New and emerging providers, with the potential to disrupt the market, are not enabled to participate. It will be seen, for example, that specific contract forms encourage the 9 Work & Pensions Select Committee, Can the Work Programme work for all user groups? (HC 2013–14, 162-I) para 145. 10 M Buchanan, ‘Work Programme under fire as charities shut down’ BBC News (London, 4 October 2012) www.bbc.co.uk/news/uk-19822669. 11 L Kay, ‘Legal advice charity Advising Communities to go into liquidation’ Third Sector (9 May 2019) www.thirdsector.co.uk/legal-advice-charity-advising-communities-go-liquidation/finance/article/ 1584081. 12 Insolvency Service, ‘Bolton charity boss banned for causing Lifeline Project to sink’, press release (Insolvency Service, 6 June 2019). 13 In 2015/16, voluntary organisations with incomes of £10 million to £100 million received the greatest amounts and proportions of income from government, with 84% of local government funding going to larger voluntary organisations: C Dayson, L Baker and J Rees, The value of small. In-depth research into the distinctive contribution, value and experiences of small and medium-sized charities in England and Wales (Lloyds Bank Foundation, 2018). 14 See, eg, SP Osborne, C Chew and K McLaughlin, ‘The Once and Future Pioneers? The Innovative Capacity of Voluntary Organisations and the Provision of Public Services: A Longitudinal Approach’ [2008] Public Management Review 51.

234  Debra Morris participation of the largest, most established, providers. As noted in the 2018 Civil Society Strategy:15 The commissioning model which applies in many of our public services, including the services commissioned by local authorities, often favours large companies who are better able to navigate complex commissioning systems, bid aggressively (including with “loss leader” bids to take more of the market), and who can carry the financial risk passed on by commissioners to providers.

The mixed economy of providers, an essential element to provide choice and encourage innovative approaches to long-standing problems, is difficult to achieve. When considering the difficulties experienced by small charities, it is important to note that these affect the vast majority of organisations that make up the charitable sector. Over 85 per cent of registered charities in England and Wales have a turn­ over of under £500,000.16 This chapter will explore the increasingly popular but risky PbR model. It will look at some potential solutions that could reduce charities’ exposure, in particular SIBs. These are a particular form of commissioning tool aimed at enabling organisations to deliver PbR contracts. With a SIB, social investors pay for the project at the start, and then receive payments based on the results achieved by the project. This chapter will analyse research findings on SIBs’ usage that suggest little e­ fficacy at solving the problems identified. In short, the thrust of the argument is that whilst there is much political support for PbR, evidenced in a number of initiatives intended to enhance its use, existing mechanisms do not make the inherently risky PbR environment safe for charities. PbR contracts are not therefore conducive to charities’ participation in the provision of public services. The next section will illustrate how this increasingly common commissioning model works and will begin a critical examination of the implications of its use for charities.

II.  Payment by Results Contracts containing clauses that allow for PbR have become more prevalent in the last decade. This means that charities providing welfare and other social services may be funded based on the prescribed and measured outcomes (results) achieved for a target population (for example, getting unemployed people back into work) rather than the services provided (for example, running job clubs). With PbR, financial rewards are dependent on the delivery of results, so that the state pays for services only if they are perceived to ‘work’ by reference to pre-defined expected outcomes. If, for any reason, the provision of service does not result in 15 Cabinet Office, Civil Society Strategy: building a future that works for everyone (HM Government, August 2018) 105. 16 See: www.gov.uk/government/publications/charity-register-statistics/recent-charity-registerstatisticscharity-commission.

Commissioning of Services by Charities in the Third Decade  235 outcomes defined as success, the provider of the service (be it a commercial entity or a charity) bears the consequences. This helps to cut wasteful public spending by transferring financial risk to the provider. However, when the provider of the service happens to be a charity, it is charitable funds that are effectively wasted. PbR was introduced in UK welfare provision in 2009 as part of the Labour Government’s Flexible New Deal17 programme for the unemployed18 and its use has increased in recent years. As part of the UK Coalition Government’s wider reforms to public services, set out in the Cabinet Office’s 2011 White Paper, the virtues of PbR were extolled:19 Open commissioning and payment by results are critical to open public services … Payment by results will build yet more accountability into the system – creating a direct financial incentive to focus on what works, but also encouraging providers to find better ways of delivering services.

The previously documented problems for charities working within the contract culture are exacerbated by the introduction of clauses in those contracts providing for PbR. Legal analysis of PbR contract terms undertaken on behalf of NCVO and involving providers from voluntary, community and social enterprise ­organisations20 found similar results to previous research on the contract culture in general. Conclusions, which mirror earlier findings on PbR, include: contracts are designed without consultation on a ‘take it or leave it’ basis; charities are not seeking legal advice before signing up; and, contract terms and reality of practice are not in line with each other. Many of these issues are inherited from previous poor contracting practice and are due to the absence of charity providers in the crucial early design, commissioning and negotiation stages of contracting.21 After three decades of public service commissioning, this is very disappointing. One potential advantage of the shift in risk towards the provider in PbR is that this should be reflected in the contract terms, which should be less prescriptive around the specifics of service delivery. Where charity providers are being paid for the results achieved, as opposed to services provided, charities should be free to deliver appropriate interventions so as to secure the agreed outcomes. It should not be necessary, for example, to specify in the contract that the c­ ommissioner 17 The Flexible New Deal was compulsory among those who had been claiming Jobseeker’s Allowance for 12 months. It was delivered by Jobcentre Plus and private providers. It sought to provide support more tailored to an individual’s needs and typically involved the individual undertaking a four-week work experience placement. In June 2011, a new Work Programme began to provide a holistic and comprehensive range of services for all claimants expected to look for work. 18 Department for Work & Pensions, Ready for work: full employment in our generation (Cm 7290, 2007). 19 HM Government, Open Public Services (White Paper, Cm 8145, 2011) paras 5.4, 5.16. 20 D Hunter and R Breidenbach-Roe, Payment By Results Contracts: A Legal Analysis of Terms and Process (NCVO, 2013). 21 One of the key themes to emerge from a literature review of 93 studies of PbR contracts was the limited amount of discussion and negotiation which takes place between commissioners and providers at all stages of the process, from considering whether PbR might be an effective approach, through specifying outcomes and incentives, to designing the contract itself: R Webster, 2016 Payment by Results: Lessons from the Literature (Oak Foundation, 2016) 3.

236  Debra Morris is to be notified in advance of any changes to the charity personnel involved in the ­ delivery. However, research has found such provisions within contracts ­examined.22 This was often found to be the case where pre-existing contracts have simply been re-tendered as ‘re-badged’ PbR contracts with new payment terms, but all the delivery terms remained the same as they were previously. It might be considered that another benefit of PbR terms is that they may facilitate innovations in terms of methodologies adopted and interventions made. However, research shows that many PbR contracts have been used to further develop or scale up existing programmes that have a proven track record of success, rather than to encourage experimental work. For example, an international study tested the innovative nature of 22 worldwide PbR schemes, funded through SIBs, and found that more than half of the examined schemes funded the expansion of an existing programme or the implementation of a programme already proved to be successful.23 Government now has a growing portfolio of PbR schemes including for the provision of welfare, housing and criminal justice, where payment depends, at least in part, on the provider achieving specified outcomes. A 2015 National Audit Office (NAO) report identified 52 programmes across six central government departments24 with PbR elements to their funding, worth around £15 billion.25 Despite this, the efficacy of outcome-based commissioning is still questionable. A literature review of over 90 studies of worldwide PbR contracts (covering the UK, Australia and US) concluded that ‘there is a consensus that the evidence base is not able to give a clear indication as to whether payment by results works’.26 One of the reasons for the lingering uncertainty is that results are often to be achieved over a long period of time. With SIBs, for example, few have produced their final outcomes. It will be seen that although there are several reviews that summarise the performance of these bonds, they are based on a relatively small number of cases and they generally offer only provisional or interim findings.

III.  The Challenges of PbR Contracts for Charities In responding to the debate question posed at the start of this chapter, the next four sections will tease out some of the specific challenges that are presented to charities 22 D Hunter and R Breidenbach-Roe, Payment By Results Contracts: A Legal Analysis of Terms and Process (NCVO, 2013). 23 M Arena et al, ‘Social Impact Bonds: Blockbuster or Flash in a Pan?’ [2016] International Journal of Public Administration 927. 24 The schemes are operated by the Department for Work & Pensions, Ministry of Justice, Department for Communities and Local Government, Department for International Development, Department for Education, Department of Health and their related bodies. 25 National Audit Office, Outcome‐based payment schemes: government’s use of payment by results (HC 2015–16, 86) para 1.8. 26 R Webster, 2016 Payment by Results: Lessons from the Literature (Oak Foundation, 2016) 36.

Commissioning of Services by Charities in the Third Decade  237 when faced with PbR contracts, supporting the view that they are not conducive to charities’ participation in the provision of public services. These focus on: risks of PbR; costs associated with PbR; the impact on beneficiaries; and problems around measurements of results in PbR contracts.

A.  Charity Trustees’ Duties and Risk Legal obligations around management of risk have specific resonance for charity trustees when considering entering into PbR contracts and may well deter their participation. Charity trustees must comply with a duty of prudence which requires them to act responsibly, reasonably and honestly.27 As part of this duty, they must ensure that their charities’ assets are used only to support or carry out their charitable purposes, and they must avoid exposing their assets, beneficiaries or reputation to undue risk. Whilst risk is an everyday aspect of most charities’ work, especially those providing contracted services, PbR contracts introduce additional elements of risk. As there is no guarantee of payment, charities will incur expenditure without the certainty of receiving income through the contract to offset it. It will be seen that this element of uncertainty is not susceptible to control by the charity provider. Charity trustees, as part of their effective governance of their charities, must consider the appropriate levels of risk to adopt and put measures in place to manage those risks.28 Trustees of charities over the audit threshold29 must report on the major risks to which the charity is exposed, confirming that they have ‘satisfied themselves that systems or procedures are established in order to manage those risks’.30 Charities that are incorporated under company law (other than small companies, as defined by company law) must prepare a strategic report, and this must contain a description of the principal risks and uncertainties facing the company, together with an explanation of how they are managed or ­mitigated.31 The trustees of smaller charities with gross income below the statutory audit threshold are also advised to make a risk management statement as a matter of good practice.32 The regulator of charities in England and Wales, the Charity Commission, considers that ‘major risks’ are those that ‘have a major impact and

27 See, generally, Charity Commission, ‘The essential trustee: what you need to know, what you need to do’ (CC3) (Charity Commission, May 2018). 28 See, generally, Charity Commission, ‘Charities and risk management’ (CC26) (Charity Commission, June 2010). 29 See Charities Act 2011, pt 8, ch 3. 30 Charities (Accounts and Reports) Regulations 2008, 2008/629, reg 40(2)(b)(ii)(ee). 31 Companies Act 2006, s 414A and s 414(C)(2)(b). 32 Charity Commission, ‘Charities and risk management’ (CC26) (Charity Commission, June 2010) para 3.3.

238  Debra Morris a probable or highly probable likelihood of occurring’.33 If they occurred, they would have a major impact on some or all of the following areas: governance; operations; finances; environmental or external factors such as public opinion or relationship with funders; or a charity’s compliance with law or regulation. ­Unfortunate examples exist to suggest that failure of PbR contracts may well fall within this category.34 Although financial experience and risk appetite may well vary amongst charity trustees, the vast majority of charity trustees are volunteers35 with strong emotional links to the charitable cause, leading them to err on the side of caution36 when it comes to taking financial risks. The duty of prudence, together with the public benefit requirement that all charities must satisfy,37 underpin the charity governance model and may mean that PbR financing and the risks that it entails are difficult for charity trustees to accept.38

B.  Financial Cost of PbR Contracts The prevalence of low reserves across the charitable sector often means that charities cannot afford to enter into PbR contracts, due to the particular funding structures and flows that are involved in such contracts. With PbR there is a delay between the provision of the service and the ability of the commissioner to determine whether the required results have been achieved. If payments are deferred for too long, this gap can undermine the financial viability of the service provider, with the risk of insolvency. This means that charity providers often have to cross-subsidise their PbR work or seek loans to cover cash flow issues caused by delay in payments.39 Many charities simply do not have the means to sustain their activities until delayed payments are made. Charities tend to have low reserves, so it is unlikely that many will be able to draw on them for such purposes. In fact many charities, especially smaller ones, operate with no reserves

33 Ibid, para 3.2. 34 See earlier discussion (in the introduction to this chapter) of a number of charities whose closure is at least partly attributed to their engagement with PbR contracts. 35 In 2017, the Charity Commission reported that, in response to a question on charities’ Annual Returns as to whether charities pay any of their trustees for their role as trustees, there was an overall positive response from some 2,000 charities or 1.6 per cent of respondents: Charity Commission, ‘Taken on Trust: Awareness and Effectiveness of Charity Trustees in England and Wales’ (Charity Commission, 2017). 36 See, eg, Peridot Partners, The Governance Paradox (Peridot, 2018) noting the current trend towards risk-averse governance in charities. 37 Charities Act 2011, s 2(1)(b). 38 These factors have been cited as reasons why charities have pulled out of PbR bidding; F Sheil and R Breidenbach-Roe, Payment by Results and the voluntary sector (NCVO, April 2014) 11. 39 NCVO, The Work Programme-Perceptions and Experiences of the Voluntary Sector (NCVO, 2012) 13.

Commissioning of Services by Charities in the Third Decade  239 at all,40 and research commissioned by the Charity Commission in 201841 revealed that few larger charities even appear to fully understand what their reserves are or how to disclose them correctly.42 Many seemed to assume that their charity had more unrestricted funds available to draw on than was in fact the case, particularly where significant amounts of funds were tied up in buildings. A separate survey in the same year43 found that the 157 best-known charities (in a Charity Brand Index) had an average of four months’ worth of spending in reserves. With longterm PbR contracts, this would not be sufficient to bridge the gap. In addition, the very nature of reserves is that they may be needed in the short to medium term and therefore trustees should ensure that they are readily realisable as cash, when needed.44 This would suggest that they should not be tied up long term in supporting PbR contracts. Delivery of service (and consequent achievement of outcomes) is sometimes impossible due to referral volumes to charities differing from those originally anticipated when PbR contracts are signed and charities’ budgets are calculated. For example, referrals to charities to provide services in the Work Programme, discussed further below, were consistently lower than originally forecast,45 supporting the view that smaller charities are simply ‘bid candy’ used by the main contractor (often a commercial entity) to improve the attractiveness of their tender.46 If charities do not receive referrals under PbR contracts, they will not get paid. One civil society organisation has described signing a 140-page-long contract only to have received no referrals at the time of the report.47 In the previous section, it was noted that charity trustees have a requirement to be prudent with charity funds. This can mean that charities choose to stick with tried and tested methods of delivery rather than to take on the financial risk associated with innovative models. In a survey of providers in 2014, over 80 per cent surveyed reported concerns about financial risk from PbR contracts.48 Researchers noted that social sector providers (including charities) were ‘especially concerned about these dynamics undermining their ability to innovate through

40 C Benard et al, The UK Civil Society Almanac 2017 (NCVO, 2017). 41 Charity Commission, ‘Reserves policies: demonstrating and building resilience’ (Charity Commission, November 2018). 42 The results echoed earlier research for Charity Finance magazine; R Preston, ‘Largest charities “overstating free reserves by almost 20 per cent”’ Civil Society (1 June 2017). 43 L Kay, ‘Best-known charities hold an average four months of reserves’ Third Sector (13 April 2018). 44 See, eg, Charity Commission, ‘Charity reserves: building resilience (CC19) (Charity Commission, September 2018) 11. 45 NCVO, The Work Programme-Perceptions and Experiences of the Voluntary Sector (NCVO, 2012) 7. 46 See, eg, the evidence of the chief executive of St Mungo’s, a charity which withdrew from the Work Programme delivery, having received no referrals: HC Work & Pensions Select Committee, Can the Work Programme work for all user groups? (2013–14, HC 162-I) para 145. 47 NCVO, The Work Programme – Initial Concerns from Civil Society Organisations (NCVO, 2011) 5. 48 D Crowe, T Gash and H Kippin, Beyond Big Contracts. Commissioning public services for better outcomes (Institute for Government, 2014).

240  Debra Morris building close relationships with citizens and communities’.49 A 2013 survey50 found that 42.1 per cent of voluntary sector provider respondents believed (as did 28.2  per  cent of local authority respondents) that the capital requirements and financial risks involved ‘completely’ limited their capacity to compete for PbR contracts. The NAO report on PbR51 also referred to evidence52 of smaller welfareto-work providers withdrawing from contracts due to the time lag between investment and payment. PbR models may therefore present challenges to charities which mean that they cannot participate. This is particularly the case for small charities that may lack access to reserves or working capital to be able to invest in delivering a service upfront prior to receiving the funding.

C.  Impact on Beneficiaries When charity providers are more concerned about how they report their results, in order to be paid via their contracted terms, or when certain beneficiaries come with more of a ‘cost’ than others, charitable beneficiaries may well lose out. Lowe and Wilson argue that outcomes-based monitoring turns the performance management of social interventions into a simplified game, which does not deal well with complex realities.53 Instead of serving the needs of their beneficiaries who, as human beings, lead complex real-world lives, charity providers may focus their efforts on how to produce the necessary performance information. The clear need to evidence results can mean that needs of beneficiaries are almost secondary for the charity providers. This may also mean that charities concentrate their activity on areas where outcomes are easily measurable.54 This may explain why some PbR programmes have reported good outcomes. An empirical study of an Australian local non-profit organisation, whose youth services provision was funded through a PbR contract, sums up the situation well in the report of an interview with a staff member:55 It’s constantly looking at numbers. Yeah, and the quality and depth of the client contact has really declined in the last couple of months because of the pressure of the new data 49 ibid 6. 50 Compact Voice, ‘Local Compact survey results 2013: Payment by Results’ (Compact Voice, 2013) www.compactvoice.org.uk/sites/default/files/payment_by_results-2013_local_compacts_survey_results. pdf. 51 National Audit Office, Outcome‐based payment schemes: government’s use of payment by results (2015–16, HC 86) para 3.15. 52 HC Work & Pensions Select Committee, Can the Work Programme work for all user groups? (2013–14, HC 162-I), vol II: Additional Written Evidence, Ev w10. 53 T Lowe and R Wilson, ‘Playing the Game of Outcomes‐based Performance Management. Is Gamesmanship Inevitable? Evidence from Theory and Practice’ [2017] Social Policy & Administration 981. 54 See, eg, M Hudson et al, The influence of outcome-based contracting on provider-led pathways to work, Research Report No 638 (Department for Work & Pensions, 2010). 55 L Keevers et al, ‘Made to Measure: Taming Practices with Results-Based Accountability’ [2012] Organization Studies 97, 114.

Commissioning of Services by Charities in the Third Decade  241 and monitoring requirements. We don’t get the funding unless we meet the targets. It’s really changed the way we work.

In what the authors describe as ‘taming social justice practice’ they note that ‘intra-action with RBA [results-based accountability] performance measurement practices risks translating quality into only quantity’.56 The level of monitoring required might be higher than when entering into regular contracts, adding to the costs of participation. An in-depth study of four UK SIBs found that some third sector stakeholders were of the view that the degree of micro-management built into the contract was actually reducing their flexibility to autonomously pursue their social mission.57 Some felt that the resources and time that went into these additional forms of performance management and measurement could be better spent on front-line services. It can also mean that certain beneficiaries are more likely to be helped than others. With such a focus on meeting targets, there is a temptation to ‘game’ the system, with PbR contracts leading to some classes of charities’ beneficiaries being left behind so that the ‘easier’ targets can be pursued. For example, under the Work Programme (which replaced the Flexible New Deal), where 80 per cent of the budget was linked to PbR, it has proved most lucrative to target young unemployed people, who pick up skills quickly, rather than focusing on harder-to-help claimants, particularly those furthest from the labour market, such as those aged over 50 and disabled people. Contractors spent less on people in these groups,58 with some being neglected, despite the fact that the differential payment model59 offered providers higher payments for achieving job outcomes for those considered harder to help. ‘Creaming and parking’ describes the situation where providers prioritise certain service recipients because they believe them to be easier to help and therefore most likely to deliver a financial return in a PbR model.60 At the same time, those service recipients least likely to achieve a desired outcome, because their needs are too costly and complex to address, are ‘parked’ by giving them minimum attention or passing them on to other organisations within a supply chain.61 Beneficiaries who need the most help may not get it, even where payment tariff structures seek to incentive personalised attention, by reflecting the cost to 56 Ibid, 115. 57 D Edmiston and A Nicholls, ‘Social Impact Bonds: The Role of Private Capital in Outcome-Based Commissioning’ Journal of Social Policy [2018] 57, 65. 58 There was strong evidence of this in research commissioned by the Department for Work & Pensions which explored the influence of outcome-based contracting upon the delivery of the Providerled Pathways to Work programme. See M Hudson et al, The influence of outcome-based contracting on provider-led pathways to work, Research Report No 638 (Department for Work & Pensions, 2010) ch 5. 59 The payment structure is summarised in Department for Work & Pensions, The Work Programme (Department for Work & Pensions, 2012) https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/49884/the-work-programme.pdf. 60 See, eg, E Carter and A Whitworth, ‘Creaming and Parking in Quasi-Marketised Welfare-to-Work Schemes: Designed Out Of or Designed In to the UK Work Programme?’ [2015] Journal of Social Policy 277. 61 See below where the use of sub-contractors in PbR contracts is considered.

242  Debra Morris ­ roviders of achieving successful interventions. Each beneficiary has a price – p those for whom a positive ‘result’ is more likely (for example, those who volunteer to benefit from the service provision or those who may have achieved the desired outcome without support) are much more valuable to the charity provider than those with greater or more complex needs (for example, those for whom engagement with the service is compulsory) for whom such a ‘result’ will be harder to achieve. Charities that want to provide personalised attention to the most vulnerable may well struggle to adapt to provision funded through PbR, where they may be forced to ‘cherry pick’ those beneficiaries who are least expensive to help. NCVO’s survey of Work Programme sub-contractors found that 13 out of 98 had to ‘park’ service users because the cost of the intervention exceeded the payment, and of the 78 that stated that they had not ‘parked’ service users, 35 had to subsidise delivery from their own reserves.62 The same research found that 29 out of 98 respondents believed that service users who would have benefitted from their expertise were not being referred to them. The particular structure of funding, with the explicit focus on reportable results, therefore means that charities providing services through PbR may not be able to prioritise the needs of their beneficiaries.

D.  Measurement and Linkage In principle, a shift from the somewhat blunt instrument of target-driven outputs to outcomes is welcome. However, social outcomes are notoriously difficult to measure. Even if outcomes are measurable, there is also a question around linkage. One challenge in the Peterborough Social Impact Bond, to be discussed later, was generating a ‘methodologically robust outcome measure, which had the confidence of all stakeholders’.63 Outcomes will rarely be achieved via one specific intervention. In reality, success or failure will be due to a diverse range of interrelated reasons, many of which may well be beyond the control of a specific service provider. PbR contracts tend not to reflect this inability of providers to have effective control over many of the external factors that determine whether or not a result is achieved.64 The payment metrics upon which all PbR programmes depend are necessarily simplified top-down targets which force providers to ignore the complex and messy lives of the real people with whom they work. The provider

62 NCVO, The Work Programme-Perceptions and Experiences of the Voluntary Sector (NCVO, 2012). 63 E Disley et al, Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough (Ministry of Justice, 2011) 36. 64 See, eg, N McHugh et al, ‘Social Impact Bonds: A Wolf in Sheep’s Clothing?’ [2013] Journal of Poverty and Social Justice 247, 249, who make this point, noting that, due to the complexities involved, both unsuccessful and successful outcomes may be due to factors external to the activities of the service provider.

Commissioning of Services by Charities in the Third Decade  243 may well retain considerable risks for outcomes that it is unable to control. For example, an unemployed person using a PbR employment service may contemporaneously benefit from housing and health services. The quality of the provision of the combination of these services will have an impact on the person’s ability to secure employment. This means attribution of outcomes to the provision of specific services is difficult to achieve, making the real success of the contracted provision impossible to judge. The necessarily long duration of some PbR contracts makes this linkage even more difficult to determine. The 2015 NAO Report65 concluded that PbR should only be used where results can be measured and attributed to providers’ interventions. Whilst there is some support for the effectiveness of outcomes-based performance management,66 it is questionable, in particular where the provider is a charity, whether PbR should be used in difficult, real-life situations, where outcomes are the product of complex, inter-related factors, most of which are beyond the control or influence of any specific programme and its contracted providers.

IV.  Structural Alleviating Measures for Charities Entering into PbR Contracts A number of challenges of PbR contracts, which support the argument that PbR contracts are not conducive to charities’ participation in the provision of public services, have been examined. In order to fully consider the debate question further, the next two sections will explore the impact of certain enabling mechanisms built into PbR contract structures, which may help charities to overcome these hurdles. Whilst each mechanism could be seen as a potential enabler for the further involvement of charities and smaller providers in PbR contracts, close examination will question whether or not this is borne out in practice. It will be seen that each mechanism has not provided a panacea but has brought its own specific challenges.

A.  The Use of Sub-Contractors in PbR Contracts One enabling feature of PbR contracts, that may support the involvement of charities in the delivery of service, at least in theory, is the way in which many large PbR

65 National Audit Office, Outcome‐based payment schemes: government’s use of payment by results (2015–16, HC 86) para 8. 66 See, eg, S Kelman and J Friedman, ‘Performance Improvement and Performance Dysfunction: An Empirical Examination of Distortionary Impacts of the Emergency Room Wait-Time Target in the English National Health Service’ [2009] Journal of Public Administration Research and Theory 917.

244  Debra Morris schemes use a range of providers to deliver services. This means that some organisations, including small charities, may be able to participate in such arrangements through a chain as a sub-contractor. For example, under the Work Programme, the Department for Work & Pensions (DWP) contracted with large ‘prime’ providers, who in turn passed work onto smaller sub-contractors (often smaller charitable providers). DWP estimated that in September 2013, there were 858 organisations acting as sub-contractors for the 40 Work Programme contracts, and 363 (42 per cent) came from the voluntary or community sector.67 However, the challenges discussed previously may well be felt even more acutely by charity sub-contractors, who are beholden to a larger organisation which is the primary contractor with the direct link to the commissioner. As one ‘social sector’68 provider put it: ‘I would never sub-contract with a government prime contractor as they appear money driven and not socially driven’.69 The level of the risk in PbR contracts is usually designed at scale, but there is evidence to suggest that prime contractors are often not absorbing any of the risk and are simply passing down the terms of the head contract to sub-contractor charities in the supply chain.70 This risk then becomes disproportionate, as each required result involves a higher level of financial risk the further down the chain it passes. To take one example, complex data reporting requirements may be acceptable for the prime contractor, but they may be disproportionate or unmanageable for sub-contractors without the appropriate resource. Research exploring the influence of outcome-based contracting upon the delivery of the Pathways to Work programme found an imbalance of power in prime provider and supply chain relationships, leading to ‘creaming’ of clients:71 The common prime provider strategy was, broadly speaking, to focus on job ready clients and encourage supply chain focus on clients requiring more intensive support and assistance to return to work.

This is despite the fact that government requires prime providers working with the DWP to comply with the ‘Merlin Standard’. The 2018 refreshed standard is built upon eight fundamental and integrated principles72 and within each principle there are a number of criteria which provide a structured, professional and

67 Department for Work & Pensions, Guidance: Organisations that supply services to the Work Programme providers (Department for Work & Pensions, 2013 [withdrawn 2016]). 68 According to the survey authors, this includes ‘voluntary and community organisations, charities, social enterprises, co-operatives and mutuals’: D Crowe, T Gash and H Kippin, Beyond Big Contracts. Commissioning public services for better outcomes (Institute for Government, 2014) 14. 69 Ibid, 39. 70 See, eg, Work & Pensions Committee, Can the Work Programme work for all user groups? (2013–14, HC 162) paras 153–67. 71 See M Hudson et al, The influence of outcome-based contracting on provider-led pathways to work, Research Report No 638 (Department for Work & Pensions, 2010) 64. 72 The eight principles are: Design, Procure, Contract, Funding, Develop, Performance Manage, QA & Compliance, and Review & Close. See www.merlinstandard.co.uk.

Commissioning of Services by Charities in the Third Decade  245 e­ ngaging approach to achieving excellence in supply chain management. The aim is to support the development, recognition and promotion of sustainable excellence, and positive partnership working within supply chains. For sub-contractors, there is an expectation of working in an environment and culture of respect, honesty, transparency and mutual support. When prime contractors are engaged in creaming and parking clients, this is inconsistent with the Merlin Standard ethos. Charities also need to carefully consider the status of the prime contractor, including its reputation, working methods, ethos and track record, before agreeing to enter into such relationships.73 Legal duties of charity trustees require them to act with care to protect their charities’ assets, reputation and beneficiaries, all of which could be damaged, should there be adverse publicity around the prime contractor and its association with charity sub-contractors. Whilst the use of sub-contracting arrangements in PbR contracts may facilitate involvement by charity providers, it has been seen that charities’ participation in this capacity may also exacerbate some of the problems surrounding PbR contracts which have been considered above.

B.  SIBs as a Way of Funding PbR Contracts It has been seen that in PbR contracts a charity must use its own money to front up the costs of providing its contracted service, in the hope that, eventually, outcomes from its service provision will generate payments to cover the costs. If commissioners are keen to attract smaller enterprises and charity providers as bidders, they may need to consider a source of social investment to run alongside the PbR contract. One way in which government has sought to support charity participation in PbR contracts is through the encouragement of the use of social bonds which transfer the financial risk of deferred or non-payment away from charities, on to third party social investors. Social bonds (or social investment/impact bonds  – generally known as SIBs) are a form of PbR contract which leverage private investment so that providers (including charities) do not have to front the cost of delivery and bear the risk of non-payment through failure to achieve the pre-defined outcomes. By way of a SIB, private non-government social investors provide the upfront capital to set up services under a PbR contract, and they are paid back if and when payment is made for the social outcomes achieved as a result of the contracted service provision. In this way, the investors bear the financial risk of failure, not the charities and other service providers. If a charity’s contracted provision results in improved social outcomes, this leads to savings for government (which will not need to pay for services that would otherwise be used by individuals with poor

73 See, eg, Charity Commission, ‘Guidance for charities with a connection to a non-charity’ (Charity Commission, March 2019).

246  Debra Morris social outcomes) and wider benefits to the community. There may well be a direct link between provision and cost saving; for example, where charity provision prevents a released prisoner re-offending, the re-imprisonment costs are saved. In other situations, savings are based on less defined cost savings brought about by, for example, an estimated contribution to a longer-term reduction in crime. The government agrees to pay a proportion of these savings back to the investors as a return on their investment, where payments for results exceed running costs and bond repayments. While current data on investors is limited, a 2017 report noted that every UK SIB that had published information on outside investment has received some (or all) of that investment from either philanthropic trusts and foundations or via government-backed social investment funds.74 For investors that are charities themselves, a SIB offers a ‘blended return’ that is a potential financial return on investment that may not be as high as other possible returns, but one which is ‘mission-aligned’, allowing them to fulfil their charitable aims by investing in an area that fits with their specific charitable mission. In other cases, investors may be private investors with a social conscience or even simply a private profit motive. Through what can be described as the privatisation of social policy, financial institutions such as JP Morgan and Goldman Sachs and consulting firms such as Deloitte, KPMG and McKinsey & Co have all been involved in SIBs.75 For example, in the US, Goldman Sachs was a pioneer investor in the SIB concept.76 Through the private sector funding charities to provide services in this way, a profit incentive is introduced, and some of the public sector savings (or ‘profit’) from successful programmes will revert to private sector investors. In this way, public money is diverted into private hands. If positive results are not achieved and payment is not forthcoming from the public sector commissioner to the charity, it is the investor that does not recoup its expenditure, not the charity. The financial return is tied to agreed outcomes laid down in the contract at the start of the bond issue. Whilst these are commonly called bonds, SIBs do not have a guaranteed rate of return, in line with the conventionally understood financial definition of a bond.77

74 Social Spider CIC, Social Impact Bonds, An Overview of the Global Market for Commissioners and Policymakers (Centre for Public Impact, 2017). The report was commissioned by the Centre for Public Impact from Social Spider CIC. 75 M Joy and J Shields, ‘Austerity in the making: reconfiguring social policy through social impact bonds’ [2018] Policy & Politics 681–95, 683. 76 Eg, in 2012, Goldman Sachs helped to fund a programme aimed at reducing the recidivism rate for adolescent offenders at the Rikers Island correctional facility in New York City: J Olson and A ­Phillips, ‘Rikers Island: The First Social Impact Bond in the United States’ [2013] Community Development Investment Review 97–101. This SIB did not achieve its targets. 77 Social Finance (the intermediary in the Peterborough SIB) describes it as ‘a hybrid instrument with some characteristics of a bond (eg, an upper limit on returns) but also characteristics of equity with a return related to performance’: E Bolton, Social Impact Bonds. Unlocking investment in rehabilitation (Social Finance, September 2010).

Commissioning of Services by Charities in the Third Decade  247 The first worldwide pilot SIB was the Peterborough SIB, established in 2010 by the Ministry of Justice and supported by the Big Lottery Fund to provide for ex-offenders who had been released from Her Majesty’s Prison (HMP) ­Peterborough after short prison sentences of less than one year.78 The aim was to break the cycle of offending by offering personal support to ex-offenders so that they could reintegrate into society.79 It was a modest scheme but very important as a pilot. It was originally intended to run until 2017, funding the delivery, largely by charities, of the One Service scheme to work with three cohorts of around 1,000 released prisoners. However, this plan was overtaken by events; the ­roll-out of a new national statutory programme – Transforming Rehabilitation – to reform probation services for all short-sentenced offenders in the UK would have resulted in duplication of service and the inability to measure the impact of the SIB-funded provision against a control group. While the pilot operated through a PbR contract for the first two cohorts of released prisoners, the third cohort was supported by a fee-for-service arrangement, paid by the Ministry of Justice, rather than under the original SIB-funded PbR model.80 The SIB was coordinated by Social Finance, a not-for-profit financial intermediary, which obtained investment funding of around £5 million from 17 private individuals and charities. A return on investment was to be paid if a minimum threshold of a 7.5 per cent reduction in reconviction events was reached across the pilot, compared to a matched control group. Additionally, there was an option to trigger an early payment if a 10 per cent reduction was noted in the number of reconviction events in individual cohorts. Ultimately, the reduction across both cohorts was estimated to be 9 per cent,81 so the outcome payment was triggered and investors received a single payment representing their initial capital plus a return of just over 3 per cent per annum for the period of investment.82 The returns were paid out of the savings that arose from the reduction in the costs associated with recidivism. From this narrative, SIBs appear to have great potential as a mechanism for involving charities in PbR contracts. SIBs may enable improvements in social outcomes by aligning the priorities of public sector commissioners, charities and socially motivated investors around a common goal, which is the better delivery

78 Reoffending has been a persistent problem for the UK criminal justice system, with national re-offending rates for short-sentenced offenders at around 60% when the Peterborough SIB was designed. Until recently, there was no statutory support for them on release. Many prisoners do not have a home or a job to go back to and are often battling mental health and substance misuse problems: Social Finance, ‘World’s 1st Social Impact Bond shown to cut reoffending and to make impact investors a return’, press release (Social Finance, 27 July 2017). 79 The details of this SIB are described in E Disley et al, Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough (Ministry of Justice, 2011) 1. 80 E Disley et al, The payment by results Social Impact Bond pilot at HMP Peterborough: final process evaluation report (Ministry of Justice, 2015) 1. 81 J Anders and R Dorsett, HMP Peterborough Social Impact Bond – cohort 2 and final cohort impact evaluation (National Institute of Social and Economic Research, June 2017). 82 Social Finance, ‘World’s 1st Social Impact Bond shown to cut reoffending and to make impact investors a return’, press release (Social Finance, 27 July 2017).

248  Debra Morris of social interventions for the public good. However, a closer examination again reveals that a potentially enabling mechanism for charities is not without its own challenges. One of the main difficulties is caused by the complexity of the ­structures surrounding a SIB. SIBS are technically extremely complicated, involving contractual arrangements and financial instruments which are resource-intensive to set up,83 leading to high transaction costs. Often the creation of a SIB has included the creation of a Special Purpose Vehicle (SPV) to manage the activity covered by the SIB contract.84 The SPV may be owned by investors, intermediaries or delivery organisations – or sometimes a combination of all three.85 A case study of the Peterborough SIB concluded:86 [T]he costs of establishing the necessary metrics,[87] baselines, legal arrangements and financial calculations are sometimes so high that the SIB is infeasible without additional funding.

The overhead costs of the SIB financing mechanism, including legal fees, intermediary costs, evaluation expenses and costs associated with investor due diligence, are primarily fixed costs and will constitute a smaller proportion of the total project as the size of the intervention grows. Therefore, in one US study88 it was suggested that generally these costs will only be worth incurring for a SIB contract worth at least US$20 million. Due to their necessary scale, the SIBs that have existed so far have tended to involve larger, rather than small, charities. Many of the latter will neither be familiar with nor have the necessary skills to deal with complex contracts. NCVO has identified that the skills required to engage in PbR contracting will include: improved understanding of costs, margins and pricing; complex modelling tools; understanding of the cost and process of acquiring capital and an ability to make a compelling case to funders; an ability to identify, assess and mitigate risk; and, greater analysis of investment and asset management opportunities.89

83 MJ Roy, N McHugh and S Sinclair, ‘Social Impact Bonds – Evidence-based policy or Ideology?’ in B Greve (ed), Handbook of Social Policy Evaluation (Cheltenham, Edward Elgar Publishing, 2017) 267. 84 See, eg, the final evaluation of the London Homelessness SIB, the second SIB to be established (after the Peterborough Prison SIB) where the establishment of an SPV for one of the providers, St Mungo’s, is described: P Mason, R Lloyd and F Nash, Qualitative Evaluation of the London Homelessness Social Impact Bond (SIB). Final Report (Department for Communities and Local Government, November 2017). 85 Social Spider CIC, Social Impact Bonds, An Overview of the Global Market for Commissioners and Policymakers (Centre for Public Impact, 2017). 86 A Nicholls and E Tomkinson, ‘The Peterborough Pilot Social Impact Bond’ in A Nicholls, R Paton and J Emerson (eds), Social Finance (Oxford, Oxford University Press, 2015) 362. 87 See E Carter et al, Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation, Evidence Report (Government Outcomes Lab, 2018) appendix, for a list of all the outcome metrics used within UK SIBs up to 2018. 88 H Azemati et al, ‘Social Impact Bonds: Lessons Learned So Far’ [2013] Community Development Investment Review 23, 27. 89 F Sheil and R Breidenbach-Roe, Payment by Results and the voluntary sector (NCVO, April 2014) 12.

Commissioning of Services by Charities in the Third Decade  249 There is also an added dimension in the inevitably complex contracting arrangements that SIBs entail, and that is the involvement of an investor in the relationship and the inescapable introduction of a profit incentive into the equation, particularly where private for-profit investors are involved. The concerns expressed earlier about the impact of PbR arrangements on beneficiaries may be exacerbated. As well as the charity provider serving the commissioning master, there is also the investor to be considered. The chances of the service users – the charities’ beneficiaries – having a voice in any discussions around service provision are even less than usual. This time, accountability and reporting systems are likely to be focused on the needs of the private investors rather than the public commissioners. Ideologically, it could be argued that SIBs support the wider agenda of public sector reform, the privatisation of social policy, and the marketisation of charities. Despite the concerns outlined above, by July 2018, 45 SIBs had been launched in the UK to address diverse social problems in areas such as criminal justice, homelessness, health, educational underachievement, and long-term unemployment. There are over 100 worldwide.90 These tackle complex social issues such as refugee employment support, loneliness among the elderly, rehousing and reskilling homeless youth, and diabetes prevention.91 Bearing in mind the drawbacks of SIBs, the question remains as to whether they may nevertheless support the delivery of better social interventions. An in-depth study of four UK SIBs examining the effect of the introduction of private capital in outcome-based commissioning concluded that:92 [T]here is, at present, very little definitive evidence to suggest that services funded through such a mechanism lead to any relative improvement in social outcomes compared to more conventional PbR commissioning models. In great part, this is due to the poor availability and standards of evidence that are currently available, and the challenges associated with accurately identifying the attainment and cause of complex social outcomes over time. However, where there is evidence available, it is rather mixed.

A further potential disadvantage of charity involvement in SIB-funded schemes is that they have tended to attract media attention due to their political sensitivity or novelty or size. This was especially the case with the pilot Peterborough SIB. For charities as service providers, this brings additional risk of reputational damage in the event of failure.

90 E Carter et al, Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation, Evidence Report (Government Outcomes Lab, 2018) 9. In the US, these are often referred to as ‘pay for success’: JK Roman et al, Five Steps to Pay for Success Implementing Pay for Success Projects in the Juvenile and Criminal Justice Systems (Urban Institute, June 2014). 91 Social Finance, ‘World’s 1st Social Impact Bond shown to cut reoffending and to make impact investors a return’, press release (Social Finance, 27 July 2017). For a full list of programmes worldwide, see https://sibdatabase.socialfinance.org.uk. 92 D Edmiston and A Nicholls, ‘Social Impact Bonds: The Role of Private Capital in Outcome-Based Commissioning’ [2018] Journal of Social Policy 57, 73.

250  Debra Morris Whilst one of the intentions behind the SIB mechanism is to better support the role of smaller charities in PbR contracts, this is yet to be achieved due to the complexity and scale associated with its use.

V.  Additional Government Support for Contracting Using PbR Despite the mixed evidence on effectiveness to date, the UK Government is keen to support the further development of contracting using PbR. For example, in 2012, the Cabinet Office set up the £20 million Social Outcomes Fund to provide a ‘top-up’ contribution to outcomes-based commissions (SIBs or PbR) that aim to deal with complex and expensive social issues.93 In the Spending Review and Autumn Statement 2015, the government pledged additional support for SIBs, investing £105 million over the Parliament to help deal with issues including homelessness, poor mental health and youth unemployment.94 It will be seen in the following two sections that, in addition to this important direct financial support, the UK Government has introduced two additional initiatives to stimulate more interest in social impact investing and other PbR pilots, by way of the introduction of Social Investment Tax Relief in 2014 and legislative clarity around the ability of charities to make social investments in 2016.

A.  Social Investment Tax Relief Since 2014,95 by way of Social Investment Tax Relief (SITR), individuals making eligible investments96 in social enterprises can deduct 30 per cent of the cost of their investment from their income tax liability, either for the tax year in which the investment is made or the previous tax year. The investment must be held for a minimum period of three years for the relief to be retained. If individuals have chargeable gains in that tax year, they can also defer their capital gains tax (CGT) liability if they invest their gain in a qualifying social investment. Tax will instead be payable when the social investment is sold or redeemed. Investors also pay no CGT on any gain on the investment itself, but they must pay income tax in the

93 Cabinet Office and The Rt Hon Nick Hurd MP, ‘New boost to help Britain’s most vulnerable young adults and the homeless’, press release (Cabinet Office, 23 November 2012). 94 HM Treasury, Spending Review and Autumn Statement 2015 (Cm 9162, November 2015) para 1.285. 95 The legislation giving effect to SITR is in Finance Act 2014, schs 11 and 12, amending the Income Tax Act 2007. See pt 5B as amended. 96 Investments must be made into charities, Community Interest Companies or Community Benefit Societies that carry out a ‘qualifying trade’, have fewer than 500 employees and have assets of no more than £15 million.

Commissioning of Services by Charities in the Third Decade  251 normal way on any dividends or interest on the investment. Initially the maximum amount of investment eligible for relief was around £300,000. This was raised to £1.5 million in April 2017. Investments in companies (including SPVs) set up to carry out a SIB are eligible for SITR, provided that the company has received accreditation as a ‘Social Impact Contractor’ from the Cabinet Office. So far, use of SITR has been limited, and the data available on this use is also limited.97 A report published by HM Revenue & Customs in May 201898 shows a total of £5.1 million raised by (up to) 35 charities and social enterprises over the first three years of SITR, compared to a predicted figure of £83.3 million – based on Treasury estimates of the cost of the relief. The first two SIBs to benefit from SITR saw 15 per cent capital raised from individuals, with their predicted returns boosted from 7 per cent per annum to equivalent of 19.3 per cent per annum as a result.99 However, a 2019 report100 acknowledges that SITR has not been a major success to date and identifies five reason for this: lack of awareness from charities and social enterprises; slow pace of legislative change (to improve its attractiveness to investors); lack of fitness for purpose (with wholesale copy and paste model from mainstream tax reliefs that apply for business investment schemes); process challenges (of proving and satisfying eligibility requirements); and lack of pipeline or mismatch between supply and demand (with investors in charities looking for opportunities that do not exist and vice versa). Positive change may follow a 2019 government call for evidence on SITR effectiveness.101

B.  Making Social Investments and Fiduciary Duties of Trustees While charitable foundation support for other charities has a long history, the extent to which charity law supports investments in social projects (as opposed to those purely aimed at financial return) has often been questioned.102 This has led to queries about charity trustees’ ability to invest in SIBs. For example, one i­ nvestor

97 D Floyd, ‘WHAT A RELIEF! A review of Social Investment Tax Relief for charities and social enterprises’ (Social Investment Business, 2019). 98 HMRC, ‘Enterprise Investment Scheme Seed Enterprise Investment Scheme and Social ­Investment Tax Relief. Statistics on Companies raising funds’ (HMRC, May 2018). 99 Ambition East Midlands and Aspire Gloucestershire were awarded PbR contracts with the Department for Communities and Local Government and Cabinet Office. The investors would only receive their interest and capital payment if the organisations were successful in meeting their targets for ­housing and supporting almost 500 vulnerable young people into education, employment and training. The capital raised enabled the charities to deliver the programmes ahead of being able to claim for outcome payments. See SB James, ‘Social investment tax relief for homelessness social impact bonds’ (Third Sector, 5 February 2015). 100 D Floyd, ‘WHAT A RELIEF! A review of Social Investment Tax Relief for charities and social enterprises’ (Social Investment Business, 2019). 101 HM Treasury, ‘Social Investment Tax Relief: call for evidence’ (HM Treasury, 24 April 2019). 102 See, eg, Harries v The Church Commissioners for England [1992] 1 WLR 1241.

252  Debra Morris in the Peterborough SIB reported concerns that undertaking social investment (and accepting a blended return) may conflict with fiduciary obligations of charity trustees to maximise financial return on investment.103 There was a lack of clarity in the (then) charity investment guidance from the Charity Commission,104 and some trustees were taking a cautious reading of it. This is despite the fact that the guidance (and the law upon which it was based) did not prohibit social investment. Charities invest so as to further their charitable aims and, whilst it is recognised that usually the best way to further those aims is to achieve the best financial return within the level of risk considered to be acceptable, it is for trustees to decide whether or not this is the case, exercising their own discretion. Charity trustees may also determine that they want to use a charity’s assets directly to further its aims in a way that may also produce some financial return for the charity. The justification for making this kind of ‘programme-related investment’ is to further the charity’s aims, rather than maximise financial returns. In making this kind of investment, trustees are not bound by the legal framework for financial investment, because their decision is about applying assets directly in furtherance of the charity’s aims. Alternatively, ‘mixed motive investment’ where the investment is for the specific purposes of both furthering a charity’s aims and generating a financial return, is also acceptable. Despite the fact that the law already facilitated both these kinds of investment, because of concerns and reluctance on the part of some trustees to accept this, as part of the government’s social investment strategy,105 the Charities (Protection and Social Investment) Act 2016 introduced a statutory power for charities to make social investments.106 Whilst it could be argued that this was unnecessary, and potentially undermines the pre-existing permissive position at common law, it does provide welcome107 clarification of charities’ ability to make social investment, and clarifies the duties of charity trustees when authorising social investment. This is defined as a ‘relevant act’108 of a charity which is carried out ‘with a view to both directly furthering the charity’s purposes and achieving a financial return for the charity’. The new legislation does not alter or override trustees’ general common

103 E Disley et al, ‘Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough’ (Ministry of Justice, 2011) 28. 104 See now, Charity Commission, ‘Charities and Investment Matters: A Guide for Trustees’ (CC14) (Charity Commission, January 2017). 105 Cabinet Office, ‘Social Investment: A Force for Social Change. 2016 Strategy’ (HM Government, 2016). 106 See now Charities Act 2011, s 292B. 107 Reponses to the Law Commission consultation that preceded the legislative change (Law Commission, ‘Social Investment by Charities’ Consultation Paper No 216, 2014) revealed ‘a sense that the law is unsatisfactory, or at least in need of clarification, and a desire for reform that would engender more certainty and would give greater confidence to charity trustees who are currently held back by uncertainty and, many consultees felt, by risk-averse advice.’ See Law Commission, ‘Social Investment by Charities. The Law Commission’s Recommendations’ (September 2014) para 1.22. 108 A ‘relevant act’ is: an application or use of funds or other property by the charity; or taking on a commitment in relation to a liability of another person which puts the charity’s funds or other property at risk of being applied or used, such as a guarantee: Charities Act 2011, s 292A(4).

Commissioning of Services by Charities in the Third Decade  253 law duties, but introduces new statutory duties that apply to all charity trustees when making decisions about social investments.109 These duties apply in place of statutory duties in the Trustee Act 2000, which relate specifically to financial investments. Before exercising any power to make social investments, trustees must: consider whether in all the circumstances any advice about the proposed social investment ought to be obtained; obtain and consider any advice which they conclude ought to be obtained; and, satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefit they expect it to achieve for the charity, by directly furthering the charity’s purposes and achieving a financial return. Trustees must also review their charity’s social investments from time to time. When introducing the new power in the House of Lords, Lord Bridges of ­Headley said that the intention was to ‘help charities to make social investments so that they can fulfil their mission in new and innovative ways’ and he said that it would ‘give charities the confidence and certainty to invest in this growing sector’.110 It is difficult at this stage to measure the impact of this power. Not long after the power was introduced, one law firm advised a Christian mission charity on how to apply the new power, and the chair of its trustee board later commented:111 [Our charity] has been committed to social investments since 2008, and as trustees we were used to dealing with the legal framework that existed before the new power. Once we understood the background and intention of the new power, it proved to be a solid platform for our considerations and helped us think creatively and confidently about how we could use [our charity’s] resources in the most impactful way.

If more charities were given such advice and then acted similarly, the new power could have significant potential. Early signs are promising. Data published in 2018 on foundation giving trends112 note that in 2016–17, 34 (11 per cent) of the top 300 charitable foundations identified programme-related or social investments in the balance sheet or notes to their accounts and that these were worth just over £120 million – a real annual increase in value of 18 per cent.

VI.  Charities in the New Contracting Environment – Towards the Future Having examined the PbR contracting environment and the challenges that it raises for charitable service providers in particular, this final section will assess the 109 Charities Act 2011, s 292C. 110 HL Deb 10 June 2015, vol 762, col 801. 111 O Hunt, ‘The new social investment power – what does it mean for trustees?’ (Big Society Capital, 15 March 2017) www.bigsocietycapital.com/latest/type/blog/new-social-investment-powerwhat-does-it-mean-trustees. 112 Cathy Pharoah and Catherine Walker with Emma Hutchins, Foundation Giving Trends 2018 (Association of Charitable Foundations, 2018) 13.

254  Debra Morris realistic chances of their successful participation, looking towards the future and some potentially positive developments on the horizon. Whilst PbR as a concept, where charities are paid for what they achieve rather than what they do, may seem on first sight instinctively attractive, it has been seen that current commissioning processes continue to be a major threat to the survival of smaller charities that may well find it difficult to negotiate this new funding model. The importance of this conclusion cannot be overestimated, bearing in mind that the vast majority of charities are small.113 There is a frequent lack of recognition by funders of the true costs to charities of delivering the vital services being commissioned. In short, the financial structures of PbR have the effect of excluding the expertise of many charitable providers, either because they choose not to participate or are unable to do so. The amount of upfront capital required to set up and sustain services until payment is achieved can be a challenge in a sector where reserves are limited, and the additional risk of non-payment may create a barrier for charity trustees, who must be prudent with charity funds. The account of the Peterborough SIB (and its interruption due to external policy changes in the form of a national restructure of probation services) reminds us that the impact on programme outcomes of the unpredictable dynamic, extraneous policy environment and political climate should not be underestimated. The contract culture environment per se is difficult for charities to negotiate. It has been seen that PbR adds a further layer of complexity and potential legal liability where the stakes are very high. PbR demands certain financial skills from providers which may not have been required before from charity trustees. Smaller charities will struggle even more to access these skills. Where charities are being funded through PbR contracts, they will also need sufficiently sophisticated data management systems in place to ensure that the specified necessary results do in fact trigger requests for payments. It has also been seen that the funding structures of PbR contracts, with the need for upfront absorption of costs, may well exclude smaller charities that operate with minimal or non-existent reserves with little access to working capital to invest in up-front costs. Traditionally, the retail banks have been reluctant to lend to charities because of low returns, the insecurity of contract-based work and the general risk profile of the sector. Whatever payment structures are used, they must offer sufficient funds for working with all charity beneficiaries, no matter how complex, sustained, or expensive their needs might be. This will help to guard against practices such as ‘creaming and parking’, discussed earlier in the context of the Work Programme. One way to use PbR to really incentivise providers to work with those with more complex needs may be to move away from a binary approach to outcomes and to introduce staged payments where ‘mini’ targets trigger payments for progress as

113 www.gov.uk/government/publications/charity-register-statistics/recent-charity-registerstatistics-charity-commission.

Commissioning of Services by Charities in the Third Decade  255 well as ultimate outcomes.114 For example, where the ultimate outcome may be that an unemployed person finds employment, an interim payment could be made if that person completes a training course. Looking towards the future, the government’s stated vision for public services is encouraging at least. The 2018 Civil Society Strategy talks of ‘collaborative commissioning’ and states:115 This means that in the future, local stakeholders will be involved in an equal and meaningful way in commissioning and all the resources of a community, including but not confined to public funding, will be deployed to tackle the community’s challenges. People will be trusted to co-design the services they use.

There are also plans for a welcome return for increased use of grant funding alongside contracted funding for charities. A blended funding model will introduce into commissioning a more proportionate attitude to risk. The Strategy notes:116 In addition to Social Impact Bonds, and to social impact investment … the government wishes to broaden the range of funding options for community initiatives. This includes a revival of grant-making – “Grants 2.0” – to reflect the fact that grants can combine flexibility with the accountability and performance rigour of a contract, and also bring “additionality”, such as philanthropic or in-kind investment.

Grant funding is particularly suited to facilitating innovation from charitable providers, something which PbR contracts have largely been unable to realise.117 Even within a commissioning scenario, a hybrid model, with an element of upfront funding together with remaining payments being triggered by the attainment of pre-agreed results, would reduce risk and incentivise innovation. This element of grant funding may better support diversity of provision and give the space and capacity to trial and test ideas. A further positive development on the horizon is that there are plans to strengthen the Public Services (Social Value) Act 2012, which currently requires commissioners to consider the economic, social and environmental, and wider value a contract can bring. It is intended to extend its requirements in central government to ensure all major procurements explicitly evaluate social value where appropriate, rather than just ‘consider’ it, as is currently the requirement.118 This will assist charities when competing for contracts and should shift the balance of

114 These are often referred to as ‘distance travelled’ measures. See, eg, M Roberts, ‘By their fruits … Applying payment by results to drugs recovery’ (UK Drug Policy Commission, 2011) 12. 115 Cabinet Office, Civil Society Strategy: building a future that works for everyone (HM Government, August 2018) 106. 116 Ibid, 111. 117 The Labour party’s civil society strategy commits to greater use of grant funding for small charities: Labour Party, ‘From Paternalism to Participation. Putting civil society at the heart of national renewal’ (Labour Party, June 2019). 118 Cabinet Office, ‘Social Value in Government Procurement. A consultation on how government should take account of social value in the award of central government contracts’ March 2019, (HM Government, March 2019).

256  Debra Morris power somewhat when charities are involved as sub-contractors in supply chains in which the prime contractor’s social credentials are less obvious. Another tool for charities to resort to in the future may be the Compact,119 which is currently almost defunct. The Compact is the agreement between the government and the voluntary sector that outlines best practice for partnership working. It talks of government using diverse funding models so as to enable smaller organisations to become involved in delivering services where they are best placed to achieve the desired outcomes. It also requires prime contractors to adhere to the terms of the Compact in allocating risk proportionately. It has not been renewed since 2010, but a revitalised agreement120 may well support a better funding environment for charities.

VII. Conclusion The question for debate was whether PbR contracts in general, and, in particular, the use of SIBs, are an effective means by which charities might be funded to deliver public services. Arguments made in this chapter in responding to this question and backed up by evidence suggest that PbR contracts are inherently risky for charities. Measures introduced to support charities and other non-profit providers wishing to use their expertise to support their beneficiaries through the provision of public services have not as of yet alleviated the difficulties presented by PbR contracts. These difficulties are exacerbated for small charities which make up the majority of the sector. Perhaps in the future charities will take their rightful place in the contracting landscape, operating as well-funded providers of social and other services in a domain in which they retain expertise and are able to deploy it to maximum effect. If and when it becomes common practice for commissioners to enter into preprocurement dialogue with providers, co-design payment models and outcomes, and use the learning from this collaboration to inform and improve future commissioning strategies, lessons will have finally been learned from decades of the contract culture.

119 The terms of the most recent Compact, published in 2010, under the Coalition government, can be read here: www.gov.uk/government/publications/government-voluntary-and-community-sectoragree-new-compact-for-working-in-partnership. 120 The Labour party’s civil society strategy commits to updating and reinvigorating voluntary sector compacts: Labour Party, ‘From Paternalism to Participation. Putting civil society at the heart of national renewal’ (Labour Party, June 2019).

12 Regulating the Digital (Currency) Revolution: Unravelling the Technological Challenge Faced by Charities MATTHEW ROBERT SHILLITO*

I. Introduction In today’s technologically astute society, new payment methods are being utilised, at an ever-increasing rate, as individuals and groups seek to avoid the often restrictive and archaic practices of the formal financial sector. Digital currencies such as bitcoin, which this chapter will primarily focus on,1 represent the latest and most evolved way to store and exchange value. Their appeal lies in the fact they allow users to pseudonymously2 transfer money across borders at near instantaneous speed, with little or no cost, and very low barriers to entry. However, whilst new technology is being adopted in a wide range of other areas, the charity sector seems either unable or unwilling to keep up with the pace of technological change and spot genuine opportunities for innovation. Digital currencies offer charities the chance to revolutionise the way they conduct their financial affairs. However, as with all payment methods, there are risks and challenges associated with their use. Whilst the technology that underpins digital currencies provides new ­opportunities for the charity sector, which will be discussed fully below, it also * Lecturer at Liverpool Law School, Email: [email protected]. Many thanks to Mike Gordon and members of the University of Liverpool Charity Law & Policy Unit for their invaluable comments on previous drafts. Any errors or omissions remain my own. 1 The chapter focuses on bitcoin because it was the world’s first cryptocurrency and is still the largest digital currency in operation. 2 ‘Pseudonymity’ is used rather than ‘anonymity’ to describe the secrecy of identifying information in relation to the majority of digital currencies. Whilst anonymity would imply that an individual cannot be identified, this is not wholly true of digital currencies transactions. They can be linked back to a wallet’s alphanumeric identifier by tracking the transaction on the publicly available blockchain which underpins all digital currency transactions.

258  Matthew Robert Shillito brings about some not-so-new legal challenges which impede the adoption of digital currencies by charities. The opportunities afforded by bitcoin have been relatively well covered in the literature,3 though only a few focus on their appeal to charities.4 However, analysis of the risks associated with the use of digital currencies are thin in the general literature, tending to focus specifically on anti-moneylaundering efforts.5 Only a few sources have considered the risks digital currencies pose for charities,6 and none has considered the debate in ­charity law as to whether the current legal framework (or lack thereof) unnecessarily hinders charities’ ­ ability to harness the potential benefits afforded to their activities by the adoption of digital currencies. In light of the above, this chapter adds to the literature by seeking to unravel the legal challenges faced by charities in attempting to keep pace with the digital revolution, and in particular, adopt digital currencies. Part II of the chapter will consider the emerging technological opportunities that digital currencies present to charities. Part III will then outline the law’s role in regulating emerging technology, so as to provide a lens for the rest of the chapter. In light of the lens, Part IV of the chapter will critically analyse five intersecting and overlapping themes, drawn from the discussion in Part III, which highlight the legal challenges that need to be addressed for charities to consider digital currencies a more viable technology to utilise. These themes are: regulatory competence and consistency, regulatory appetite, effectiveness, proportionality, and incidental impact. Finally, by way of concluding remarks, Part V will consider what this tells us about the ability of charities to adopt digital currencies. Digital currencies offer a new efficient way of conducting our financial affairs. As a result, they have the potential to benefit charities financially. They are a quick, affordable and borderless way of transferring funds, and potentially bring to charities a range of new donors. However, adoption is not simple; at present they are synonymous with criminal activity and are largely unregulated, and so the chapter will address how the law can assist in making digital currencies more appealing to charities. First, it will argue that the limited competence of international actors 3 See, eg, A Bouveret and V Haksar, ‘What Are Cryptocurrencies? A Potential New Form of Money Offers Benefits While Posing Risks’ (2018) 55(2) Finance & Development 26. 4 Charities Aid Foundation, ‘Giving a Bit(coin): Cryptocurrency and Philanthropy’ (Giving Thought discussion paper no 3, May 2015) www.cafonline.org/docs/default-source/about-us-publications/ givingabitcoin-cryptocurrency-philanthropy-may2015.pdf?sfvrsn=5; and J Plummer, ‘Blockchain: What Charities Really Need to Know’ (Third Sector, 1 June 2018) www.thirdsector.co.uk/ blockchain-charities-really-need-know/digital/article/1466334. 5 See, eg, RA Stokes, ‘Virtual Money Laundering: The Case of Bitcoin and the Linden Dollar’ (2012) 21(3) Information & Communications Technology Law 221; and DS Brown, ‘Cryptocurrency and ­Criminality: The Bitcoin Opportunity’ (2016) 89(4) Police Journal 327. 6 P Hackney and B Mittendorf, ‘Charities take digital money now – and the risks that go with it’ (The Conversation, 3 October 2018) http://theconversation.com/charities-take-digital-money-nowand-the-risks-that-go-with-it-103983; WeTrust Editorial Team, ‘What Charities Need to Understand Before Accepting Crypto’ (WeTrust, 27 June 2018) https://blog.wetrust.io/what-charities-need-tounderstand-before-accepting-crypto-53edb3f74907; and Charities Aid Foundation, ‘Giving a Bit(coin)’ (2015) (n  4).

Regulating the Digital (Currency) Revolution  259 prevents the effective coordination of a counter-financial crime digital currency strategy. Second, it will contend that there is a lack of regulatory appetite to implement a digital currency strategy and that this makes charities more averse to adoption. Third, it will argue that some of the measures introduced to tackle digital currency abuse are not fit for purpose. Fourth, it will note that proportionality issues impede the uptake of the digital currencies, in comparison to other payment methods. Fifth, it will explain that there may be some incidental impacts of utilising digital currencies that reduce a charity’s appetite to engage with them. Finally, the chapter will argue that the legal issues we see here are not new, and the fact that we have yet to solve them in traditional contexts makes it less likely we will solve them in relation to digital currencies. Whilst these challenges persist, digital currencies will fail to be attractive to any more than a few opportunistic risk-taking charities, of which there are few.

II.  Digital Currencies as an Emerging Technological Opportunity for Charities Before moving into the central part of the chapter, which critiques why law (or the lack thereof) inhibits the uptake of digital currencies by charities, it must be established how and why digital currencies, and the technology behind them, present an opportunity for the charity sector. Digital currencies offer a two-fold opportunity for charities: first, they open up a new fundraising stream; and second, they provide a new mechanism for charities to move funds. It is these two factors which have enticed charities, such as Unicef, to embrace the digital currency revolution. In relation to the first opportunity, finance is the lifeblood of charities; their very existence depends on being able to collect funds to finance their activities. In the UK alone, it is estimated that charitable income is around £77.4 billion per year.7 Despite initial reports to the contrary,8 there is little evidence to suggest that challenging economic events in the last decade, such as the global financial crisis and Brexit, have had any impact on donor appetite to give.9 However, in the longer term, the likely UK withdrawal from the EU will result in a loss of £258 million of EU funding for UK charities.10 Significantly, the more challenging issue for the 7 Charity Commission for England and Wales, ‘Recent Charity Register Statistics: Charity Commission’, www.gov.uk/government/publications/charity-register-statistics/recent-charity-regiterstatistics-charity-commission. 8 A Jamieson, ‘Charity Donations Hit by Financial Crisis’ The Telegraph (London, 8 November 2008) www.telegraph.co.uk/finance/financialcrisis/3405594/Charity-donations-hit-by-financial-crisis.html. 9 Charities Aid Foundation, CAF UK Giving 2018: An Overview of Charitable Giving in the UK (Report) (March 2018) 18, www.cafonline.org/docs/default-source/about-us-publications/caf-ukgiving-2018-report.pdf. 10 D Ferrell-Schweppenstedde, ‘UK Charities Will lose £258m of EU Money After Brexit. Where’s the Plan?’ The Guardian (London, 7 December 2017) www.theguardian.com/voluntary-sector-network/ 2017/dec/07/charities-lose-at-least-258m-after-brexit-no-government-strategy.

260  Matthew Robert Shillito sector is the fact that individuals are changing their financial habits. Debit card payments have recently overtaken cash as the most prevalent payment type.11 Indeed, this is reflected in the fact that 70 per cent of UK charities have reported a decrease in cash donations in the last three years.12 It is clear, then, that charities need to look for alternative funding streams and consider how new, emerging payment mechanisms may plug the gaps left in their funding by decreasing cash donations. The need for such thinking is underlined by the fact that newer payment mechanisms are particularly prevalent amongst younger generations,13 meaning that cash donations are only likely to further decrease. Digital currencies, such as bitcoin, are one potential avenue which can be considered to plug the funding gap. Given that the technology is still developing, and that there are some significant developments for digital currencies in the ­short-term future, it is important to consider both their current and future fundraising potential. At present, digital currency donors are most likely to be individuals who have either made a profit through mining14 digital currencies and/or who have experienced an increase in value in their digital assets over the course of the time they have held them. These individuals then donate a percentage of their returns. Less prevalently, donors may be individuals who have bought digital currencies at a similar or lower value to what they are now worth and have decided for whatever reason to donate all or part of their digital currency holding to charity. It is clear, then, that the current state of play leads to donations, but given the relatively low usage compared to other payment methods, that donations from digital currencies cannot yet be considered a significant fundraising stream. However, looking to the future, new developments around digital currencies, in particular the entry into the market of established companies and financial service providers15 offers the potential for substantial growth in uptake relative to other payment methods, resulting in digital currencies becoming a credible and consistent stream of funding for charities. It is this potential, alongside some other benefits outlined below, that makes it worth charities’ time and resources to investigate and consider adopting digital currencies as a funding stream.

11 UK Finance, UK Payment Markets Summary (Report) (UK Finance, 2018) 3, www.ukfinance.org. uk/system/files/Summary-UK-Payment-Markets-2018.pdf. 12 Institute of Fundraising, Cash and Digital Payments in the New Economy: Call for Evidence Response by the Institute of Fundraising (Report) (Institute of Fundraising, June 2018) 1, www.instituteof-fundraising.org.uk/library/hm-treasury-call-for-evidence-on-cash-and-digital-payments-in/ cash-and-digital-payments-response.pdf. 13 Ibid, 2. 14 Mining is the process of utilising computer power to solve mathematical problems on the digital currency network, in return for some of that digital currency. For a good explanation of the mining process, see: J Aron, ‘Future of Money: Virtual Cash Gets Real’ (New Scientist, 1 June 2011) www.newscientist.com/article/mg21028155-600-future-of-money-virtual-cash-gets-real/. 15 K Wilberding, ‘Facebook’s Libra Cryptocurrency: How It Stacks Up to Bitcoin and Paypal’ The Wall Street Journal (New York, 28 June 2019) www.wsj.com/articles/facebooks-libra-cryptocurrencyhow-it-stacks-up-to-bitcoin-and-paypal-11561714204.

Regulating the Digital (Currency) Revolution  261 Alongside the above outlined potential financial benefit, there are also certain technological features of accepting payment in digital currencies, which may be appealing to charities and donors alike. One of the key features of digital currencies is the pseudonymity they afford. This has the potential to attract more donations to a charity that accepts digital currencies as a donation method. The reasons for this are that first, it facilitates the giving of funds in a way where the donor is not ­reliant on any other individual or institution to assist in the masking of their identity. This is likely to be appealing to altruistic donors who give for giving’s sake, and not to boost their own image. Second, and linked to the first, a wider group of donors may be inclined to donate in this way where they wish to give but with the guarantee they will not receive follow-up emails and messages. Alongside this, there is also a level of transparency with digital currencies that is unparalleled, namely that the blockchain enables individuals to follow their transaction and see where it ultimately ends up. This could be a huge marketing tool for charities, offering them the potential to promote their transparency by encouraging donors to follow their donations through the blockchain. Significantly, given this is all facilitated by the underlying technology, it is an advantage that requires little on the part of ­charities, other than deciding to accept digital currency donations. Speed is another key feature of digital currencies that may attract charitable usage of digital currencies.16 The decentralised system harnesses users’ computer power to process and confirm transactions.17 When coupled with the ability to scan a charity’s QR code, giving becomes speedy, with little effort required from the donor. This perhaps most closely replicates, in the current cashless society, the low effort of donating cash in collection buckets. Finally, many digital currency wallets18 can be set up so that they instantly transfer any currency received into the charity’s chosen fiat currency. This may appeal to charities, as it enables them to accept digital currencies, therefore attracting a range of new donors whilst maintaining their funds (once received) in a more stable local currency. The second significant opportunity identified above relates to the transferring of funds. Digital currencies offer the opportunity for charities to quickly transfer funds, both nationally and internationally,19 at a relatively low cost.20 However, whilst at face value digital currencies appear to be a cheap way for charities to transfer money, the costs involved may in fact be misleading where the intention following the transferring of digital currency is to revert it back to fiat currency.

16 E Southall and M Taylor, ‘Bitcoins’ (2013) 19(6) Computer and Telecommunications Law Review 177, 178. 17 For more on how quickly bitcoin transactions are confirmed, see: Blockchain, ‘Median Confirmation Time’ www.blockchain.com/charts/median-confirmation-time. 18 A digital currency wallet is a software program that enables users to send and receive digital currency and monitor their balance. It does so by storing the private and public keys. 19 J Turpin, ‘Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework’ (2014) 21(1) Indiana Journal of Global Legal Studies 335. 20 Southall and Taylor, ‘Bitcoins’ (2013) (n 16) 178.

262  Matthew Robert Shillito Usually, a small fee is charged on digital currency transactions to incentivise bitcoin network miners to include the transaction within their block and thus confirm the transaction in a prompt manner.21 In terms of the transfer, given the price volatility of digital currencies, it is unlikely that a charity would hold value in digital currencies. It would therefore usually need to purchase digital currencies before the transaction and sell them as soon as it is complete. However, unlike international transfers by traditional mechanisms, where funds are transferred and changed once from ‘originating state currency’ (eg, British Pound) to ‘receiving state currency’ (eg, Euro), where digital currencies are utilised for the transfer, funds are changed from ‘originating state currency’ (eg, British Pound) to ‘intermediary digital currency’ (eg, bitcoin) and subsequently changed into ‘receiving state currency’ (eg, Euro). This means the charity is likely to lose money due to exchange rates on two occasions, rather than simply once under traditional methods of transfer. Obviously, if the money could be transferred and then spent in digital currency form, it would be comparable to other methods of transfer. However, digital currencies still lack widescale adoption, and so for funds to be used in a practical way it is necessary to change them into the relevant fiat currency. Whilst this presents an additional cost, another is removed, as the use of digital currencies removes the need to pay intermediary fees to correspondent banks because the process all occurs on one platform.22 So, it is clear then that whilst transferring funds utilising digital currencies may provide some savings, this is currently limited until they become more widely accepted as a payment method, removing the need for funds to be transferred back to fiat currency. As things stand, cost should not be the sole driver of utilising digital currencies to transfer funds. Looking towards the future, should digital currencies be made more appealing through appropriate laws being introduced, charities would potentially be able to conduct all their financial affairs through them, and in turn avoid the issue of banks de-risking and withdrawing their banking facility, in line with their anti-money laundering obligations, on the basis that the charities operate in risky areas of the world. This section has highlighted that digital currencies can provide benefits to charities both in terms of fundraising and also in terms of the transfer of funds. The instability of digital currencies as a place to store funds and the lack of widescale adoption have been highlighted as factors which impede the benefits outlined above. The rest of the chapter will focus on the (re)emerging legal challenges that need addressing if charities are ever truly going to be able to reap the benefits of digital currencies.

21 Usually, this fee will be between $0.2 and $1.5, irrespective of the size of the transfer. For more, see: Bitcoin Fees, ‘Bitcoin Transaction Fees’, https://bitcoinfees.info. Whilst no fee is required, paying a small fee results in a significantly faster confirmation time, meaning transfers are faster. The higher the fee, the faster the confirmation. If no fee is paid, the speed advantage of digital currencies is diminished. 22 Deloitte, Impacts of the Blockchain on Fund Distribution (Report) (Deloitte, 2018) 16, www2.deloitte. com/content/dam/Deloitte/lu/Documents/technology/lu_impact-blockchain-fund-distribution.pdf.

Regulating the Digital (Currency) Revolution  263

III.  Regulation of (Emerging) Technology as a Research Lens Since bitcoin came to prominence, legal academics have increasingly become concerned about the opportunities and risks that digital currencies present in terms of regulation.23 Despite this, few jurisdictions have developed, and even fewer have implemented, any financial crime regulation of the area.24 In the UK, there is evidence to suggest that criminal abuse of digital currencies is recognised, but little in terms of actual regulatory action resulting from this.25 However, in the short to medium term, this is likely to change in order for the UK to comply with its obligations as a Financial Action Task Force (FATF) member,26 and in line with its current EU membership.27 It is notable that even to get to this point, progress has been slow, and that the mechanisms proposed do not solve the whole issue or consider appropriately the impacts on other sectors. Therefore, it is relevant to consider how the law has responded over time to other technological challenges. Consideration of the wider ‘regulation of (emerging) technology’ literature establishes themes that will assist in unravelling the legal challenges presented by digital currencies to charities. 23 See, eg Stokes, ‘Virtual Money Laundering’ (2012) (n 5); P de Filippi, ‘Bitcoin: A Regulatory Nightmare to a Libertarian Dream’ (2014) 3(2) Internet Policy Review 43; and P Seele, ‘Let Us Not Forget: Crypto Means Secret. Cryptocurrencies as Enabler of Unethical and Illegal Business and the Question of Regulation’ (2018) 3(1) Humanistic Management Journal 133. 24 The Law Library of Congress, Global Legal Research Center, Regulation of Cryptocurrency Around the World (Law Library of Congress, June 2018) www.loc.gov/law/help/cryptocurrency/ cryptocurrency-world-survey.pdf. 25 See, eg, HM Treasury, ‘Digital Currencies: Response to the Call for Information’ (Report) (HM  Treasury, March 2015) https://assets.publishing.service.gov.uk/government/uploads/system/ uploads/attachment_data/file/414040/digital_currencies_response_to_call_for_information_final_ changes.pdf; HM Treasury, Financial Conduct Authority, and Bank of England, ‘Cryptoassets Taskforce: final report’ (Report) (HM Treasury et al, October 2018) https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_ report_final_web.pdf; and Financial Conduct Authority, ‘Guidance on Cryptoassets’ (Consultation Paper CP19/3) (Financial Conduct Authority, January 2019) www.fca.org.uk/publication/consultation/ cp19-03.pdf. 26 Since issuing their ‘Guidance for a risk-based approach to virtual currencies’ in 2015, the FATF has kept a close eye on digital currencies and updated this guidance. For more, see: FATF, ‘Guidance for a risk-based approach: Virtual assets and virtual asset service providers’ (Report) (FATF, 2019) www.fatf-gafi.org/media/fatf/documents/recommendations/RBA-VA-VASPs.pdf. In October 2018, FATF Recommendation 15 and its glossary were updated to clarify which businesses and activities the FATF requirements apply to within this field. In advance of their October 2019 plenary meeting, the FATF are now revising their methodology to assess how countries comply with this new requirement and note that they will be keeping a close watch on members over the next 12 months. For more, see: FATF, ‘Outcomes FATF Plenary, 16–21 June 2019’ (FATF, June 2019) www.fatf-gafi.org/publications/fatfgeneral/documents/outcomes-plenary-june-2019.html. 27 At present, despite the uncertainty surrounding Brexit, the UK will be implementing the 5th EU Anti-Money Laundering Directive on or before 20th January 2020. For more, see: HM Treasury, ‘Transposition of the Fifth Money Laundering Directive: Consultation’ (Consultation Paper) (April  2019) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/ file/795670/20190415_Consultation_on_the_Transposition_of_5MLD__web.pdf. This will require the UK to regulate the digital currency sector in line with the EU Directive.

264  Matthew Robert Shillito It should be no surprise that regulators and various stakeholders in the UK are struggling to realise the promising benefits and manage the disruptive impacts of digital currencies, given this is the case internationally for a host of different emerging technologies.28 The slowness in developing appropriate responses can be somewhat explained by the fact that ‘it is widely accepted that regulating emerging technology is a challenge due to uncertainty and limited knowledge in the management and assessment of new risks’.29 Indeed, the struggle for regulators in terms of assessing the ‘uncertainty’ and ‘risk’ of new technologies has been long recognised.30 Owing to this, it is almost impossible for law to not be ‘too narrow … or too broad’ in terms of defining the issue, given it has to envisage all future implications and changes.31 It is worth noting, at this stage, that whilst emerging technology presents a host of difficult questions for regulators to deal with, these are often old legal issues reinvigorated by a new technology.32 Part of the reason these can take so long to develop a response to is that the law is unsatisfactorily developed in terms of dealing with crime typologies in their traditional form – never mind their technologically adapted state. Crucially, without taking time and care, the responses of regulators can both ‘stifle innovation and amplify risk’.33 Whilst, the ‘pacing problem’34 and the ‘Collingridge dilemma’35 are two ways this issue has been framed, Brownsword’s concept of ‘regulatory ­connection’36 has emerged as the predominant way to analyse law’s (in)capability to adapt to technological advances. For the law to effectively deal with the d ­ evelopment of new

28 Government Office for Science, ‘Innovation: Managing Risk, Not Avoiding It’ (Annual Report) (Government Office for Science, 2014) www.oxfordmartin.ox.ac.uk/downloads/reports/14-1190binnovation-managing-risk-evidence.pdf; and L Bennett Moses, ‘Agents of Change: How the Law “Copes” with Technological Change’ (2011) 20(4) Griffith Law Review 765. 29 M Weimer and L Marin, ‘The Role of Law in Managing the Tension between Risk and Innovation: Introduction to the Special Issue on Regulating New and Emerging Technologies’ (2016) 7(3) European Journal of Risk Regulation 469, 469. 30 See, as examples, G Laurie, SHE Harmon and F Arzuaga, ‘Foresighting Futures: Law, New Technologies and the Challenges of Regulating for Uncertainty’ (2012) 4(1) Law, Innovation and T ­ echnology 1; MBA van Asselt and O Renn, ‘Risk Governance’ (2011) 14 Journal of Risk Research 431; and U Beck, Risk Society: Towards a New Modernity (London, SAGE Publications, 1992). 31 MD Szabo and B Vissy, ‘Regulating the Future? Law, Ethics, and Emerging Technologies’ (2011) 9(3) Journal of Information, Communication & Ethics in Society 180, 183. 32 E Stokes and DM Bowman, ‘Looking Back to the Future of Regulating New Technologies: The Cases of Nanotechnologies and Synthetic Biology’ (2012) 3 European Journal of Risk Regulation 235, 235. 33 Government Office for Science ‘Innovation: Managing Risk, Not Avoiding It’ (2014) (n 28). 34 The ‘pacing problem’ describes the inability of law to keep up with technological development. For more, see: GE Marchant, BR Allenby and JR Herkert, The Growing Gap Between Emerging Technologies and Legal-Ethical Oversight, 7th edn (Dordrecht, Springer, 2011). 35 The ‘Collingridge dilemma’ essentially entails that efforts to influence the future development of technology face a two-fold issue: first, a knowledge challenge, in that technology cannot be fully understood until it is developed and used; second, an influence problem, in that once a technology is widely used, it is difficult to influence its development and usage. For more, see: D Collingridge, The Social Control of Technology (Pinter, 1980). 36 For more, see: R Brownsword and M Goodwin, Law and Technologies of the Twenty-First Century: Text and Materials (Cambridge, Cambridge University Press, 2012) ch 6.

Regulating the Digital (Currency) Revolution  265 payment methods, beyond digital currencies, it is imperative that all aspects of law remain technology-neutral and connected.37 To that end, it is not uncommon for law ‘designed for the technological landscape of the past’ to require­ reconnection;38 we will see this below, particularly when considering the law surrounding Gift Aid. Given the power of law to either encourage or stifle innovation,39 consideration must be given as to whether to intervene, and if so, to what extent.40 There are competing interests when it comes to regulating new technology; on the one hand it is imperative that regulations do not discriminate against as-yet-unknown opportunities, whilst on the other hand it is important that the possibility of innovation does not preclude regulators’ willingness to create a strong enough regulatory framework that is capable of countering the risks that the emerging technology presents.41 Indeed, it is the purpose of regulation to ‘enable innovation, while at the same time protecting society from unintended consequences’.42 The literature tends to be biased towards the promotion of innovation, but this is because most inventions are in the health and bioscience sectors, where criminal abuse is less prevalent.43 However, it is not uncommon for other literature to focus more on technology’s potential for criminal abuse, and therefore focus more on regulation and less on innovation.44 Digital currencies, particularly in the present context, require a greater consideration of allowing sufficient room for growth whilst balancing this against the need to regulate against the potential for criminal abuse. In terms of the law’s response to digital currencies, it is clear from the foregoing discussion that there is not an easy path to follow. Indeed, ‘innovation is a complex, multifactorial phenomenon, and developing regulatory responses to it is ­challenging’.45 An immediate thought may be to develop new regulatory frameworks.46 However, in reflecting on past regulatory responses to emerging

37 S Carnmel, A Lbsch and A Nordmann, ‘A “Scanning Probe Agency” as an Institution of Permanent Vigilance’ in M Goodwin, Bert-Jaap Koops and R Leenes, Dimensions of Technology Regulation (Nymegen, Wolf, 2010) 125. 38 Brownsword and Goodwin, Law and Technologies of the Twenty-First Century (2012) (n 36). 39 Bert-Jaap Koops, ‘Should ICT Regulation be Technology-Neutral?’ in Bert-Jaap Koops et al, ­Starting Points for ICT Regulation: Deconstructing Prevalent Policy One-Liners (The Hague, Asser Press, 2006) 77. 40 Stokes and Bowman, ‘Looking Back to the Future of Regulating New Technologies’ (2012) (n 32) 235. 41 W van den Daele, ‘Access to New Technology: In Defense of the Liberal Regime of Innovation’ in Bert-Jaap Koops et al, Starting Points for ICT Regulation: Deconstructing Prevalent Policy One-Liners (The Hague, Asser Press, 2006) 85. 42 U Beck, Risk Society: Towards a New Modernity (London, SAGE Publications, 1992). 43 Stokes and Bowman (2012) (n 32) 237–8. 44 Eg, see MR Shillito, ‘Untangling the “Dark Web”: An Emerging Technological Challenge for the Criminal Law’ (2019) 74(2) Information & Communications Technology Law 186. 45 C Ford, ‘Innovation as a Challenge to Regulation’ (The Regulatory Review, 12 March 2018) www. theregreview.org/2018/03/12/ford-innovation-regulation/. 46 Stokes and Bowman (2012) (n 32) 235.

266  Matthew Robert Shillito technology, it is evident that existing regulation will most likely simply require some adaption to be applicable to the new medium.47 This dichotomy will be reflected throughout the rest of the chapter, and to a large extent the answer in this context will depend on whether the challenges presented are genuinely new or whether they represent the re-emergence of traditional challenges in a new form. Where the challenge is a (re)emerging one in a new form, it is likely that it is regulatory adaption that is needed. It would be useful going forwards if regulation remains technology-neutral, as this aids adaption to new technology.48 It is important to note, however, that this rule can be set aside where there is a moral objection to the technology that necessitates technology-specific regulation.49 It may be the case, where the issue is a less socially significant one, that self-regulation and guidance are favoured.50 Alongside all of this, it is relevant to consider how existing bodies ‘such as law reform agencies or proposed specialised institutions might help law makers and regulators [as well as charities]’,51 in this endeavour. Whatever route is taken, it is clear that ‘negotiating the mix of hope, hype, fear and quotidian use’ of new technologies will not be easy.52 Finally, it is suggested that if the regulation of (emerging) technology is to be a useful lens for analysing the legal challenges faced by charities in adopting digital currencies, then it must ‘yield insights that could not be gained by looking at the problem of regulation either more broadly (for instance regulatory theory) or more narrowly (in a particular technological or regulatory context)’.53 To that end, the insights in this section on emerging technology regulation will be used to ­critically analyse the role law can play in promoting the usage of digital currencies by charities and reducing the risks their usage presents.

IV.  Unravelling the Legal Challenges Posed by Digital Currencies to Charities This section will explore five interrelating themes identified from discussion in the previous section to highlight the legal challenges to more widespread adoption of digital currencies by charities. As noted in the introduction, the five thematic headings for analysis are: regulatory competence and consistency, regulatory appetite, effectiveness, proportionality, and incidental impact. It is worthy of note

47 Ibid. 48 Carnmel, Lbsch and Nordmann, ‘A “Scanning Probe Agency”’ (2010) (n 37) 125. 49 For good discussion of the benefits and risks of technology-specific regulation, see C Reed, ‘Taking Sides on Technology Neutrality’ (2007) 4(3) SCRIPT-ed 263, 283–284. 50 Stokes and Bowman (2012) (n 32) 235. 51 Carnmel, Lbsch and Nordmann, (2010) (n 37) 125. 52 O Bekou and T Murphy, ‘Editorial’ (2010) 10(4) Human Rights Law Review 597, 597. 53 LB Moses, ‘How to Think about Law, Regulation and Technology: Problems with ‘Technology’ as a Regulatory Target’ (2015) 5(1) Law, Innovation and Technology 1, 14.

Regulating the Digital (Currency) Revolution  267 that whilst digital currencies are a new technological opportunity for charities to maximise, the below challenges to their adoption are not so new. Often the challenges are ones that charities have long faced in relation to other developments, to which no answer has been found. These challenges should also be considered in light of the resource and expertise limits within charities.

A.  Regulatory Competence and Consistency Challenge On an international level the responsibility for dealing with the threat that digital currencies cause has fallen on the FATF,54 by virtue of their role as the international standard setter for ‘combatting money laundering, terrorist financing, and the financing of proliferation, and other related threats to the integrity of the international financial system.’55 United Nations (UN) instruments purely criminalise financial crime, and make provisions relating to cooperation between states. They do not consider how to tackle the abuse of specific payment methods, and so are not relevant to this discussion.56 FATF’s limited competence is a significant challenge when it comes to addressing the crime risks of digital currencies. FATF’s competence is derived from its membership,57 and furthermore, their Recommendations are non-binding and the principles which they promote are open to interpretation by states as to how to implement them into domestic law.58 Countries have diverse legal, administrative and operational frameworks, and as such a one-size-fits-all approach would not work.59 To this end, the FATF Recommendations are best described as ‘mandates for action by a country, if that country wants to be viewed by the international community as meeting international standards’.60 Such instruments are common practice on the international stage,61 and are chosen over other forms 54 The FATF’s focus on digital currencies was first identified in 2010. For more, see: Financial Action Task Force, ‘Money Laundering Using New Payment Methods’ (Report) (October 2010) www.fatf-gafi. org/media/fatf/documents/reports/ML%20using%20New%20Payment%20Methods.pdf. 55 Financial Action Task Force, ‘International Standards on Combatting Money Laundering and the Financing of Terrorism & Proliferation, The FATF Recommendations’ (Report) (February 2012, updated June 2019) 6, www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20 Recommendations%202012.pdf. 56 Financial Action Task Force, ‘FATF Recommendations Support United Nations Instruments’, www.fatf-gafi.org/publications/fatfgeneral/documents/unscs-nov-13.html. 57 At present, there are over 180 countries which implement the FATF Recommendations. Whilst there are only 39 full FATF members, the rest are associate members by virtue of their membership of one of 9 FATF-Style Regional Bodies. For more, see: FATF, ‘FATF Members and Observers’, www.fatfgafi.org/about/membersandobservers/. 58 MR Shillito, ‘Countering Terrorist Financing via Non-Profit Organisations: Assessing Why Few States Comply with the International Recommendations’ (2015) 6(3) Nonprofit Policy Forum 325, 333. 59 Ibid. 60 PA Schott, Reference Guide to Anti-Money Laundering and Combatting the Financing of Terrorism 2nd edn (World Bank/IMF, 2006) III-9. 61 DM Johnston, Consent and Commitment in the World Community: The Classification and Analysis of International Instruments, 1st edn (Netherlands, Brill, 1999).

268  Matthew Robert Shillito due to the advantages they offer in relation to speed of adoption and because they are perceived as being useful for technical matters which may need repeated revision.62 However, it does mean that states may choose not to comply, and also may struggle to interpret the proposals and thus either fail to implement them or implement them ineffectively. In an effort to avoid these outcomes, the FATF does have a system of assessment of its members’ compliance with the Recommendations.63 It has been stated that such a system of reported assessments should be enough to ensure ­compliance,64 and that, in addition, the political and peer pressure arising from the process can be used to induce others to change their practices.65 On the whole, the assessment process is considered very successful in achieving its aims.66 However, issues can be overlooked when they are not perceived as integral parts of the FATF framework, and persistent failure, across multiple jurisdictions, to implement a Recommendation can be ignored for a long period of time.67 The end result of FATF’s lack of competence is that their Recommendations may not be implemented, and even where they are implemented this is likely to be very different across jurisdictions. This creates uncertainty, but also most importantly for this chapter a significant burden for charities to understand the differences in digital currency laws in all jurisdictions in which they operate. Further, it does little to reduce the criminal stigma attached to digital currency usage and fails to prevent the volatile price changes. This is likely to serve as a barrier to charity engagement with digital currencies. In Europe, the issue is somewhat alleviated by the EU, which undertakes to implement the FATF Recommendations through its Money Laundering­ Directives, thus ensuring compliance and the harmonisation of laws across its Member States. However, as international charities are most likely to be active in countries outside the EU, this is perhaps only a small comfort. G20 member nations have also reaffirmed their commitment to implementing FATF Recommendations, and in particular implementing their digital currency measures into national law.68 The UK’s intended withdrawal from the EU could result in the UK

62 D Shelton, ‘Normative Hierarchy in International Law’ (2006) The American Journal of International Law 291, 322. 63 For more on the assessment process, see: MR Shillito, ‘Countering Terrorist Financing via ­Non-Profit Organisations: Assessing Why Few States Comply with the International Recommendations’ (2015) (n 58). 64 CM Chinkin, ‘The Challenge of Soft Law: Development and Change in International Law’ (1989) 38 International and Comparative Law Quarterly 850, 862–863. 65 D Shelton, ‘Normative Hierarchy in International Law’ (2006) (n 62) 319. 66 Financial Action Task Force, Annual Report 2010–2011 (Report) (2011) 5, www.fatf-gafi.org/ media/fatf/documents/reports/FORMATTED%20ANNUAL%20REPORT%20FOR%20PRINTING.pdf. 67 MR Shillito, ‘Countering Terrorist Financing via Non-Profit Organisations: Assessing Why Few States Comply with the International Recommendations’ (2015) (n 58). 68 Japan Ministry of Finance, ‘Communique: G20 Finance Ministers and Central Bank Governors Meeting’ (Fukuoka, June 2019) www.mof.go.jp/english/international_policy/convention/g20/ communique.htm.

Regulating the Digital (Currency) Revolution  269 introducing its own separate digital currency laws in the future, which would add to the uncertainty and inconsistency for UK-based charities.

B.  Regulatory Appetite Challenge The second challenge, which is alluded to throughout this chapter, is the lack of regulatory appetite to introduce regulation aimed at curbing abuse of digital currencies and at promoting their positive uses. Indeed, throughout the world progress towards regulating digital currencies has been slow. Bitcoin, the world’s first and most prominent digital currency, was released over a decade ago, and started to gain wider attention around five years ago. Yet, international actors are only now bringing in countermeasures. The FATF, despite researching their risks,69 have only recently agreed to introduce standards aimed at regulating and supervising virtual asset financial activities.70 The same is also true of the EU, which is only now introducing measures through its Fifth Money Laundering Directive.71 Somewhat naturally, the UK has currently not implemented any regu­ lation on digital currencies, and will now transpose the Fifth Money Laundering ­Directive into national law. However, there is a long way still to go; the Fifth Money ­Laundering Directive is only the first iteration of regulation of digital currencies, and furthermore it is only implemented in the 28 Member States. Other c­ ountries need to make their own efforts to implement the FATF guidelines. This is an international issue given that digital currencies are borderless; for regulation to be truly effective, a number of countries need to be regulating against its abuse. The international effort to curb crime linked to the use of digital currencies is only as strong as the response of the weakest state. Until such a point that the appetite to fight abuse of digital currencies increases both nationally and globally, then they will remain susceptible to abuse and unappealing to charities, despite the opportunities they offer.

C.  Effectiveness Challenge The effectiveness of anti-money laundering laws when applied to digital currencies is also a significant issue. If these laws are ineffective, then they will fail to curb

69 See, for instance, FATF, ‘Virtual Currencies – Key definitions and Potential AML/CFT Risks’ (Report) (June 2014) www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitionsand-potential-aml-cft-risks.pdf; and FATF, ‘Guidance for a Risk-Based Approach to Virtual Currencies’ (Report) (June 2015) www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-VirtualCurrencies.pdf. 70 US Department of the Treasury, ‘U.S. Concludes Successful Term as President of the Financial Action Task Force’ (21 June 2019) https://home.treasury.gov/news/press-releases/sm714. 71 Directive (EU) 2018/842.

270  Matthew Robert Shillito the crime threats that digital currencies present. This in turn will make charities less likely to engage with them due to the threat of reputation damage from being associated with a currency used for illegitimate purposes. Further, the currency is likely to remain volatile with low uptake unless it is regulated effectively, again dissuading charities from utilising it. The first challenge is evidencing that bitcoins have been used for illegitimate purposes, but this is incredibly difficult.72 However, bitcoin is not untraceable; as has been noted previously, it is pseudonymous. Utilising the publicly accessible blockchain, any transaction can be linked back to a wallet. The difficulty lies in linking a wallet to an individual. This can become even more challenging when an individual operates numerous wallets, or where they have set up a wallet with fake details.73 Advanced money-laundering techniques such as ‘smurfing’ can further complicate this.74 Increasingly, ‘dark wallets’ are being used by dark web criminals to further conceal their identity. These wallets encrypt and mix users’ payments to make money flows untraceable. Looking to the future, the challenge may get still harder, as criminals look to utilise privacy-focused digital currencies such as Monero, Zcash and Dash, which mask identifying information.75 The second area where the law’s effectiveness can be challenged is in relation to confiscating the proceeds of crime. If law enforcement agencies cannot gain control of digital currency, then the law fails to bite. There are a few factors that hinder law enforcement agencies successfully controlling criminal assets held in digital currencies. First, digital currencies have no central bank that law enforcement officials can ask to freeze funds. Second, funds move quickly, so without a body to freeze them they can be almost impossible to locate. Third, the funds may be located outside the reach of the investigating jurisdiction, or across multiple jurisdictions. Fourth, and perhaps most significantly, even when law enforcement officials do find the funds, they are reliant either on the criminal complying by providing them with their private key or on the criminal having been careless by making a note of the private key somewhere. Without this, officials cannot confiscate the funds. Crucially, there is no reason for a criminal to hand over their

72 P Larratt, P Taylor, DS Wall, S Naqvi, M Shillito, R Stokes, ‘Innovation and the Application of Knowledge for More Effective Policing’ (Report) (13 July 2017) http://n8prp.org.uk/wp-content/ uploads/2017/08/N8-Cryptocurrency-Report.pdf 22 July 2019. 73 Financial Action Task Force, Guidance for a Risk-Based Approach to Virtual Currencies (Report) (June 2015) 11–13, www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-VirtualCurrencies.pdf. 74 ‘Smurfing’ is the process of breaking down large cash deposits into a number of smaller deposits in an attempt to evade detection. (See: E Takáts, ‘A Theory of “Crying Wolf ’’: The Economics of Money Laundering Enforcement’ (2007) International Monetary Fund Working Paper 07/81, www.imf.org/ external/pubs/ft/wp/2007/wp0781.pdf. 75 European Parliament, Virtual Currencies and Terrorist Financing: Assessing the Risks and Evaluating Responses (May 2018) PE 604.970, 32.

Regulating the Digital (Currency) Revolution  271 private bitcoin key voluntarily.76 In light of this, digital currencies are considered a key strategic threat77 and ‘technically challenging’ to confiscate.78 Critically, given the lack of regulatory action in the UK, discussed above in this chapter, law enforcement agencies are left to interpret how the Proceeds of Crime Act, Part VII applies to digital currencies. This is a significant burden, given that they have received little or no training and so are almost doomed to fail. Nothing in this section suggests that UK regulation of digital currencies is going to successfully tackle their susceptibility to abuse any time soon, and therefore they will remain too risky for the majority of charities to consider engaging with, irrespective of the opportunities their usage may present. Indeed, charities these days are often global brands and therefore need to protect their reputations.79 Given that in recent times, a range of charities have been severely impacted by the damage that scandals they are associated with cause to their brand,80 it is perhaps unsurprising that they are averse to utilising digital currencies when digital technologies are almost synonymous with a range of crimes.

D.  Proportionality Challenges In seeking to regulate digital currencies to serve the dual aim of promoting further innovation whilst also preventing criminal abuse, proportionality issues have arisen. The first of these relates to the regulatory approach that should be adopted. Whilst some countries have sought to ban digital currencies, others favour regulating their usage. Predominantly, however, world-wide digital currencies remain unregulated. The second proportionality issue relates to how Gift Aid law is, or more appropriately is not, applied to digital currencies in comparison to other payment methods.

i.  Approach to Regulation As identified at the outset of this chapter, the first issue that needs to be addressed when regulators are looking at new technologies is whether they require fresh 76 MR Shillito (2019) (n 44) 201. 77 HM Government, Serious and Organised Crime Strategy (Report) (November 2018) Cm 9718, 14, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/ file/752850/SOC-2018-web.pdf. 78 European Parliament, Virtual Currencies and Terrorist Financing: Assessing the Risks and Evaluating Responses (May 2018) PE 604.970, 57. 79 For more on charities as brands, see: P Hankinson, ‘Brand Orientation in the Charity Sector: A Framework for Discussion and Research’ (2001) 6 (3) International Journal of Nonprofit and Voluntary Sector Marketing 231. 80 For examples, see Charity Law & Policy Unit, ‘Charity Governance: Looking Backwards to Move Forwards’ (20 February 2019) www.liverpool.ac.uk/law/research/charity-law-and-policy/ charity-governance/.

272  Matthew Robert Shillito intervention or whether measures that are already in place adequately cover them.81 At present, there appears to be widespread agreement that regulation is needed.82 However, in the UK, like many other jurisdictions, progress towards implementing regulatory measures has been slow.83 Where regulation has been implemented, there have been two contrasting approaches. The first (more controversial) approach has been to ban the use of digital currencies. The second (more proportionate but resource-intensive) approach has been to allow the use of digital currencies, but to create a framework for tackling their abuse, normally through targeting the proceeds of crime measures. As will be outlined below, both are tried and tested, but neither is perfect. Largely, this is indicative of the challenge outlined above of needing to balance preventing abuse with leaving enough freedom for them to flourish. Such a balancing act seems almost impossible, and in some cases undesirable. Some countries have sought, to varying extents, to ban the use of digital currencies, most notably China,84 Vietnam,85 and India.86 Whilst banning digital currencies might serve the purpose of removing their crime threat, it also removes the potential benefits they offer. It is questionable whether this is a proportionate response to their risk, particularly where they offer such potential for positive use in the charity sector. In any event, it is also debatable how successful this strategy would be. A ban is likely to succeed in deterring the average law-abiding citizen from utilising digital currencies, and it may have some merit in terms of protecting consumers. However, it is unlikely to deter a seasoned criminal from utilising them, especially where it is not an international blanket ban adopted by all. Perhaps a good indicator of the lack of proportionality of this approach is the

81 Stokes and Bowman (2012) (n 32) 235. 82 Financial Action Task Force, ‘Public Statement – Mitigating Risks from Virtual Assets’ (February 2019) www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtualassets-interpretive-note.html. 83 The government has consulted on digital currencies, and responded to the findings, however as yet there is no tangible outcome of this process. See: HM Treasury, ‘Digital Currencies: Call for Information’ (3 November 2014) www.gov.uk/government/consultations/digital-currencies-call-for-information/ digital-currencies-call-for-information. 84 It is fair to suggest that China has adopted risk-averse approach to regulating digital currencies. All financial institutions and third-party payment providers are banned from accepting, using and selling digital currencies, while all websites that facilitate digital currency trading have been blocked. For more, see: S Leng, ‘Beijing bans bitcoin, but when did it all go wrong for cryptocurrencies in China?’ South China Morning Post (5 February 2018) www.scmp.com/news/china/economy/article/2132119/ beijing-bans-bitcoin-when-did-it-all-go-wrong-cryptocurrencies. 85 Vietnam’s central bank has banned the use of digital currencies as a means of payment. For more, see: D Palmer, ‘Vietnam’s Central Bank Announces Ban on Bitcoin Payments’ Coindesk (31 October 2017) www.coindesk.com/vietnams-central-bank-announces-ban-on-bitcoin-payments. 86 India has banned the use of digital currencies; however, it is still considering a central bank offered digital currency. It is also considering large fines and prison sentences of up to ten years for anyone caught using digital currencies. For more, see: J Biggs, ‘Indian Panel Proposes Fines and Jail Time for Cryptocurrency Use’ Coindesk (23 June 2019) www.coindesk.com/ indian-panel-proposes-ban-and-jail-time-for-cryptocurrency-use.

Regulating the Digital (Currency) Revolution  273 fact that Russia is now moving from the ban it adopted for several years to a more open approach that acknowledges the positive uses of digital currencies.87 The approach more widely adopted, or which will be more widely adopted, is to permit the use of digital currencies but to attempt to regulate them appropriately. This is achieved primarily through the implementation of anti-money laundering measures. This approach has been led by and advocated for by the FATF. However, it is still far from successful. Whilst countries such as Australia have implemented some safeguards, on the whole countries are still trying to assess how their antimoney laundering mechanisms may be tailored to the digital currency threat. The EU’s Fifth Money Laundering Directive will implement several mechanisms to curb digital currency abuse across EU Member States.88 Notably, the Directive sets out measures that will regulate certain digital currency businesses (wallet providers and exchange services) in a similar way to that in which banks are regulated, eg by following customer due diligence measures, transaction monitoring and record-keeping, and reporting suspicious activity.89 What is clear is that no common approach has yet been developed. The work of the FATF and the EU may see countries converge in their approach. However, until this happens, we are left in a situation where there is uncertainty for charities who are looking to engage with digital currencies. It is difficult for them to know what mechanisms countries are imposing, and more significantly, law in the area is still developing, so they would need to stay abreast of developments. At present, the possible benefits do not seem to justify such an undertaking.

ii.  Gift Aid Approach The proportionality issue in relation to Gift Aid is whether its application (or lack thereof) to digital currencies is a fair outcome in comparison to how it is applied to other payment methods. Gift Aid gives relief for some gifts of money to charity by individuals.90 It provides an extra 25p for every £1 donated, as charities can reclaim the basic rate of tax on the gift.91 This is obviously a significant benefit to charities and one that they seek to take advantage of. There are a few challenges that stand in the way of a digital currency donation being eligible for Gift Aid. First and foremost, there is a requirement that the d ­ onation take the form of ‘a sum of money’.92 This is a contentious issue, and

87 M Pervunin and T Sangadzhieva, ‘Russia’ (2018) 1 The Virtual Currency Regulation Review 243. 88 Directive (EU) 2018/842. 89 Whilst many digital currency exchanges throughout Europe already implement these measures, such a move will harmonise responses and discourage bad actors from acting in the digital currency sphere. 90 Income Tax Act 2007, s 413(1). 91 Ibid, s 414. 92 Ibid, s 416(2).

274  Matthew Robert Shillito in relation to bitcoin we have seen arguments both for and against. Bjerg argues that digital currencies are money, suggesting we need to change our perceptions of what constitutes money rather than simply saying bitcoin does not meet our ­expectations.93 The Bank of England advocates following economic theory when assessing whether digital currencies constitute money, by considering to what extent they act as a store of value, a medium of exchange, and a unit of account.94 They suggest that at present digital currencies ‘act’ as money only to a limited extent and only for relatively few people.95 Significantly, this formulation stops short of saying that they are money. In clear contrast to these two, Yermack suggests that digital currencies largely fail to satisfy the economic theory approach and behave ‘more like a speculative investment than a currency’.96 Undoubtedly, this is true as things stand; the price is too volatile to be used as an effective store of value, and digital currencies are accepted in too few places to be a useful medium of exchange to all bar a few tech-savvy individuals using it in a specific context. It is entirely possible, though, that these issues could be fixed, and therefore digital currencies could be classed as money. Case law lends some weight to the fact that bitcoin and digital currencies could be considered to be money, as the Court of Justice for the European Union found it to be VAT-exempt on the basis of a ‘currency exception’ in Article 135(1)(e) of the VAT Directive.97 In the US, case law has been inconsistent in deciding whether bitcoin amounts to money, with some decisions suggesting that it does not98 and others suggesting that it does.99 What is clear is that it is not an easy distinction to make. Given the uncertainty, and the fact that there at least seems to be an acceptance that digital currencies can be used as money, in limited circumstances at present, then we should be looking to apply Gift Aid to them. The main barrier to this is the pseudonymity associated with digital currencies and how charities would identify individuals to be able to reclaim their tax on the gift. Again, this is not insurmountable, as a separate declaration would work. The issue would be whether the typical bitcoin donor wishes to disclose their identity regardless of the additional funds the charity would receive. However, until such a time that digital currencies are treated equally to other payment methods for the purposes of Gift Aid, it is unlikely that charities are going to want to advocate usage of digital currencies

93 O Bjerg, ‘How is Bitcoin Money?’ (2016) 33(1) Theory, Culture & Society 53. 94 R Ali, J Barrdear, R Clews and J Southgate, ‘The Economics of Digital Currencies’ Q3 Quarterly Bulletin (2014) www.bankofengland.co.uk/-/media/boe/files/digital-currencies/the-economics-ofdigital-currencies. 95 Ibid. 96 D Yermack, ‘Is Bitcoin a Real Currency? An Economic Appraisal’ (NBER Working Paper No 19747) (December 2013, revised April 2014) www.nber.org/papers/w19747. 97 Skatteverket v David Hedqvist, Case C-264/14. 98 See, for instance, State v Espinoza No F14-2923 (Fl Cir Ct July 22, 2016). 99 See: United States v Faiella 39 F Supp 3d 544, 545 (SDNY 2014) and EC v Shavers 2013 WL 4028182 (ED Tex Aug 6, 2013).

Regulating the Digital (Currency) Revolution  275 to their wider donor base, as it would result in them not receiving Gift Aid on any donations received by this medium. At present, if accepting digital currency ­donations, they may satisfy themselves that these are gifts they would not have received otherwise.

E.  Incidental Impact Challenge The removal of a charity’s financial services by a bank, owing to de-risking in line with their anti-money laundering obligations, has been a longstanding issue for the sector.100 Significantly, whilst digital currencies may one day provide a solution to this phenomenon if they gain broad appeal and change how we conduct our financial affairs, at present they may give cause for banks to de-risk. In particular, the challenge at present is that de-risking tends to occur in response to perceived regulatory risk, not in response to an assessment of actual risk of illicit activity. The result of this is that banks may choose to remove financial services provided to charities where they are utilising digital currencies. This will be particularly true where the other challenges raised throughout this chapter are not successfully addressed by regulation, meaning that digital currencies become synonymous with crime and particularly the dark web. At present, charities are reliant on banks to provide their financial services. Without banks, charities cannot make the international transactions that are necessary for some of them to function, whether that be directly, or by putting funds into other payment methods.101 If it does turn out to be the case that banks will de-risk and remove the financial services they offer to charities on the basis that the usage of digital currencies obscures both the trail of financial flows and the purposes for which they were sent, then this will be a significant barrier to the adoption of digital currencies by charities. Put simply, they cannot afford to reap the currently limited benefits of digital currencies at the expense of losing access to their main financial accounts. At present, we have no indication that this would be the case. However, given digital currencies’ crime links and their less-than-transparent nature, banks will more than likely feel that these present too much of a risk for banks to engage with. The difficulty is that there is no easy solution to this challenge. The issue is broader than banks simply being risk-averse. It is a political issue stemming from the need to implement a strong anti-money-laundering framework that holds banks accountable where there are breaches. It seems somewhat unlikely that a bank would be willing to expose itself to the risks of charities transferring funds through digital

100 FATF, ‘FATF clarifies risk-based approach: case-by-case, not wholesale de-risking’ (23 October 2014) www.fatf-gafi.org/documents/news/rba-and-de-risking.html; and Charity & Security Network, ‘Financial Access and De-Risking: Impact on Nonprofit Organisations’ (June 2015) www.somaliangoconsortium.org%2Fdocs%2Fkey%2F17%2F2015%2F1439110614.docx&usg=AFQjCNHERqxmYmyB NMhY7yYGqmYPsjx4nw&sig2=8octf_Yzb60FIot0i_IS0A. 101 Ibid.

276  Matthew Robert Shillito currencies when there are other methods charities could utilise that are more well understood and have better oversight.

V.  Concluding Remarks – A Digital Future for Charities? At present, it is clear that digital currencies present an opportunity, as evidenced by the growing number of charities engaging with them. However, whilst adoption is growing, it is fair to say that the numbers can still be considered as limited at present. If digital currencies are going to move beyond having potential and into providing actual demonstrable benefits for charities, then it is clear that the plethora of challenges, identified through the five thematic headings in the c­ hapter, need to be addressed. The first challenge the chapter identified was that bodies at an international level have limits to their competence in this area, which results in them simply making recommendations to Member States. The result of this is an incoherent approach to regulating digital currencies, varying from country to country. This is a significant challenge, particularly for international charities who by virtue of their global reach would be required to have a working knowledge of the laws relating to digital currencies (or lack thereof) in each jurisdiction in which they operate. Second, the chapter identified the challenge of regulatory appetite. Progress towards regulating digital currencies has been slow across much of the world and in the UK, the consequence of which is that regulation remains on the horizon rather than being active. Until such a time that there is a broader appetite to regulate digital currencies across many jurisdictions, digital currencies’ appeal to charities will be limited due to the negative stigma of crime associated with them and their extreme fluctuations in value. The third challenge, that of effectiveness, links to the second; even where jurisdictions implement measures designed to curb criminal abuse of digital currencies, these are inappropriate for the task at hand and so may never remove some of the negatives which dissuade charities from using digital currencies. The fourth identified challenge was proportionality issues around the regulatory approach taken to digital currencies and with regard to the application of Gift Aid. Different regulatory approaches create uncertainty, and where countries ban the use of digital currencies this is unlikely to preclude usage by criminals but will certainly preclude usage by legitimate actors. In relation to the Gift Aid issue, given that the situation in relation to digital currencies and their eligibility for Gift Aid is ambiguous to say the least, charities will not want to promote its usage above other payment methods as this will result in less income. So, until there is a solution to the Gift Aid issue charities will only want digital currencies to be a supplementary gifting mechanism, attracting new donors who may not have donated were it not for the digital currency option. The fifth challenge highlighted was that the use of digital currencies by charities may lead

Regulating the Digital (Currency) Revolution  277 to banks de-risking and withdrawing banking services from charities owing to the crime risk associated with their usage. Given that digital currencies are in their infancy, and appear unsuitable as both a store of value and as a regular means of exchange owing to a lack of widespread acceptance, charities are still reliant on traditional banking services and therefore cannot afford to lose these for the relatively limited benefits provided by digital currencies, as outlined above. Finally, it should be remembered that the issues presented are regulatory challenges that are magnified by the particular context of charities, in that they are risk-averse and have limited resources. Whilst the opportunities presented to charities by digital currencies are new, the challenges presented to their adoption are longstanding state-level issues that have lacked adequate solutions. As a result, addressing the challenges to digital currency adoption by charities is a substantial regulatory issue that appears to have no quick fix. The consequence is that these challenges, when combined, are a significant barrier to digital currency usage by charities, for all bar a few larger and/or opportunistic entities. It is important to remember that law has a role in promoting innovation and innovative uses of technology, as well as its more traditional use in curbing abuse. Whilst law is somewhat naturally reactive rather than proactive, it is imperative that in both these roles it is faster in its development if it is going to assist in the promotion of new technologies. Further, those involved in developing digital currency legislation are unlikely to be considering its impact in relation to the charity sector, and this needs to change. It is therefore important that the sector is receptive to new technologies and willing to engage with regulators so that their views and goals can be reflected in future legislation. If law can be quicker to respond to new technologies, and the charity sector more engaged in the digital revolution, then they will be in a position to maximise future opportunities. Indeed, if digital currencies can grow and shed the negative perceptions held of them, they will offer charities the benefits outlined at the outset of this chapter with limited risk. On top of this, they may also offer a new way for charities to conduct their financial affairs, without the need for the formal financial system. This may prevent the situation whereby a bank de-risks and removes financial services from a charity on the basis that it operates in an area of the world perceived as risky. Significantly, this chapter has revealed that the challenges to charitable adoption of digital currencies are likely to be insuperable until we have suitable regulation. Digital currencies have great potential, making it worthwhile for the regulatory environment to overcome the challenges identified here. Unless this occurs, the charity sector may be left behind by the digital revolution, which is changing how we go about our everyday lives, not just how we manage and utilise our finances.

278

13 Social Housing – Charities and Vulnerable Groups WARREN BARR*

I. Introduction Words have no power to impress the mind without the exquisite horror of their reality.1

This quotation provides a chilling, if doubtless hyperbolic, statement of the current position of social housing in England.2 Social housing can be defined as housing originally designed to support people who could not afford or access housing of an acceptable standard, provided by local authorities3 or by housing ­associations,4 either as delegates of local authorities or to meet housing needs in their own right. Following the Grenfell Tower disaster,5 the whole operation of the social housing sector has been under scrutiny, resulting in the government publishing a Green Paper on the future of social housing6 and a year-long,

* My thanks are due, in particular, for the comments of the editors of this book in improving this piece. This chapter endeavours to state the law as at 1 June 2019. 1 EA Poe, The Narrative of Arthur Gordon Pym of Nantucket (1838). 2 This chapter concerns itself primarily with the English position, though the picture is equally bleak across the other parts of the UK. Similarly, the themes explored here will resonate across other countries who provide an equivalent of social housing, eg in Australia, there is a call to deal with systemic issues of affordability in the social housing sector – see https://shelter.org.au/ and www.abc.net.au/ news/2019-08-12/fact-check-social-housing-lowest-level/11403298. 3 Often referred to in literature as ‘council housing’. 4 Previously, many of these organisations were known as Registered Social Landlords. The taxonomy was changed under the Housing and Regeneration Act 2008 (Consequential Provisions) Order 2010, SI 2010/866, as part of the overhaul of regulation of the social housing sector. 5 This saw a 24-storey block of predominantly social housing flats destroyed by fire, resulting in major loss of life due to unsafe cladding on the tower itself. Numerous failings have been uncovered following investigations into the incident – see, eg, the broad-ranging legal and policy analysis commissioned by Shelter of major gaps in regulatory coherence and legal provision in the light of this disaster: H Carr et al, Closing the Gaps: Health and Safety At Home (Universities of Kent and Bristol, 2017). It has also resulted in legislative change to address weaknesses in health and safety regulations – the Home (Fitness for Human Habitation) Act 2019, which came into force on the 20 March 2019. 6 Ministry of Housing, Communities and Local Government (MHCLG), A New Deal for Social Housing (Cm 9671, 2018).

280  Warren Barr cross-party housing commission led by Shelter,7 which reported its findings in January 2019.8 The conclusions of the Shelter Commission report demonstrate that the social housing sector is in crisis in funding, housing stock and services, as well as in terms of the position it enjoys in the cultural and policy landscape. The statistics underpinning the report make for uncomfortable reading.9 The lack of suitable social housing stock means that there are 1,157,044 households currently on the waiting list for a home.10 A significant number of these are in chronic housing need, including 250,639 living in unsanitary or overcrowded conditions and 144,196 who are homeless.11 The waiting time on the list can be a long one, as the Shelter Commission report found that over a quarter of households who have been allocated a social home had to wait for more than a year, and seven per cent for more than five years.12 Increasingly the social housing sector is being seen as a sector of last resort.13 Social housing also seeks to provide homes for some of the most vulnerable people in society, whether such vulnerability arises through health, poverty or other circumstances. Those considered particularly vulnerable are often able to access special legislative rules and duties around housing, affording them greater priority and access in some circumstances.14 One such group includes those who may be classed as mentally vulnerable individuals.15 Mentally vulnerable individuals are more likely to find themselves homeless or to require specially adapted housing or attendant services to lead fulfilling lives, due to the nature of their mental health problems. The complexity of accessing support can also mean that such vulnerable individuals are unable to access the help they need.

7 Shelter, a registered charity dedicated to eradicating homelessness, brought together a group of 16  independent commissioners from across the two main political parties and from diverse backgrounds to ensure that a national conversation about the future of social housing took place. 8 Shelter, Building for our Future: A Vision for Social Housing. The Final Report of Shelter’s Commission on the Future of Social Housing (Shelter, January 2019), hereinafter referred to as the ‘Shelter Commission report’. 9 Shelter Commission report, ch 1. 10 MHCLG, ‘Local authority housing statistics data returns for 2016 to 2017 (MHCLG, 2018) section C – Allocations’, www.gov.uk/government/statistical-data-sets/local-authority-housing-statisticsdata-returns-for-2016-to-2017. 11 Ibid. 12 MHCLG, ‘English Housing Survey 2016 to 2017: social rented sector (MHCLG, 2018) annex, table 3.12, www.gov.uk/government/statistics/english-housing-survey-2016-to-2017-social-rented-sector. 13 See D Cowan and M McDermont, Regulating Social Housing: Governing Decline (Abingdon, Routledge-Cavendish, 2006). 14 Some of these, in relation to allocation, will be discussed later in this chapter, but more generally, see J Alder & C Handy, Housing Associations: A Legal Handbook (London, Legal Action Group, 2018) ch 7. 15 For present purposes, the term ‘mentally vulnerable’ comprises those suffering from clinically recognised mental disorders, such as schizophrenia; those with a form of organic brain malfunction, such as dementia or brain damage following injury; and those with a learning difficulty. This is a large and diverse group, covering a spectrum between those who may be able to live independently with little or no support to those with enduring, chronic mental health needs.

Social Housing – Charities and Vulnerable Groups  281 It is unsurprising that charities have historically played an important role in social housing and did much to innovate and grow the sector in the nineteenth century.16 Research17 has found that charities remain important actors in social housing, particularly for groups such as mentally vulnerable individuals. Although charities were no longer the principal vehicle for meeting social needs in this area,18 they were of more than residual importance in what they did.19 The role charities were found to play was a complex one,20 and one that often saw them addressing the needs of the most vulnerable in society either through providing housing itself or by supplying the specialist services that were and are increasingly lacking from mainstream registered private providers’ services.21 The debate posed by this chapter is whether charities still have an effective role to play in the modern social housing landscape, considering the vast array of challenges existing in the social housing sector generally, particularly in meeting the needs of vulnerable groups. The example of mentally vulnerable people will be used as a case study for other vulnerable groups, as much of what will be considered would be equally relevant to those made vulnerable through poverty, age, infirmity or other conditions and circumstances. In order to answer the question posed for debate, Part II will set the scene by considering the accepted benefits and concerns that arise from the operation of charities in the social housing sector. Part III will identify and assess the challenges facing charities that operate in the social housing sector for the vulnerable, both within the housing sector and for charities themselves. It will analyse charities’ contributions in meeting those challenges and the strengths and weaknesses they may bring. It will be argued that, while the problems besetting social housing are beyond the scope of the charitable sector to solve – requiring instead significant public ­investment – if charities did not provide these services the sector would be even worse off, and much need would go unmet. The particular features of charity, such as fidelity to charitable mission and the ability to amplify the voices of vulnerable social housing tenants in public and policy discourse, make charities uniquely situated to incrementally improve the social housing situation. Part IV of the chapter will conclude that the most particular contribution that charities bring is in their function of advocating for change, of which the Shelter Commission report is an excellent example. 16 See W Barr, ‘Leases: rethinking possession against vulnerable groups’ in E Cooke (ed), Modern Studies in Property Law: Volume 4 (Oxford, Hart Publishing Ltd, 2007). 17 See W Barr & N Glover-Thomas, Housing the Mentally Vulnerable – The Role of Charities (Liverpool, Charity Law Unit, 2005) www.liverpool.ac.uk/media/livacuk/law/2-research/clpu/ HousingMVReport05.pdf. This arose from a research project funded by the Economic and Social Research Council (reference no RES-000-22-0286). 18 See M McDermont, Governing, Independence and Expertise: The Business of Housing Associations (Oxford, Hart Publishing Ltd, 2010) ch 3. 19 See N Glover-Thomas & W Barr, ‘Re-examining the Benefits of Charitable Involvement in Housing the Mentally Vulnerable’ (2008) Northern Ireland Legal Quarterly 177. 20 See N Glover-Thomas & W Barr, ‘Enabling or Disabling? Increasing Involvement of Charities in Social Housing’ [2009] 73 The Conveyancer and Property Lawyer 209. 21 Glover-Thomas & Barr, ‘Re-examining the Benefits’ (2008) (n 19) 180.

282  Warren Barr

II.  Understanding Charities and Social Housing A.  Outline of the Regulatory and Legal Framework Charitable organisations must normally be registered22 with the Charity Commission.23 An exception is organisations that are exempt – such as almshouses that provide housing services for those most in need – but which remain subject to the regulatory oversight of the Commission.24 The regulator is set up to fulfil five specified objectives, which include ensuring charity trustees comply with legal duties and that public confidence in charities is maintained.25 Those charities that provide housing as charitable providers of social houses are also regulated by the Regulator of Social Housing,26 a statutory committee of Homes England.27 The provision of social housing, or services to the same, is not a charitable purpose in itself,28 but may fall within numerous charitable purposes.29 A common purpose would be the relief of poverty where, as the Charity Commission notes: ‘Increasingly, social rented housing is mainly for those in extreme need. So providing it will be charitable in almost every case’.30

B.  The Known Role of Charities in Housing (Mentally) Vulnerable People The historical role of charities in social housing is a story of complexity, both in terms of the multiple roles that charities have traditionally played within 22 To be eligible for registration as charities, under the Charities Act 2011, such organisations must have as their object a recognised charitable purpose (s 3), must demonstrate that they carry on their purposes for the benefit of the public (s 4), and must be wholly and exclusively charitable (s 2). See, generally, R Pearce & W Barr, Pearce & Stevens’ Trusts and Equitable Obligations, 7th edn, (Oxford, Oxford University Press, 2018) ch 16. 23 Charities Act 2011, pt 2, s 13. While the functions of the Commission are to be exercised on behalf of the Crown, s 13(4) makes clear that it shall not be subject to control by a government department or any Minister of the Crown. 24 Other organisations, such as not for profits or private companies, may of course undertake activities akin to those of charities, but they are not regulated, nor do they enjoy the fiscal or other privileges of charity – on the latter, see, generally, Pearce & Barr, Pearce & Stevens’ Trusts and Equitable Obligations (2018) (n 22) ch 15. 25 Charities Act 2011, s 14. The five objectives are the public confidence objective, the public benefit objective, the compliance objective, the charitable resources objective and the accountability objective. 26 Housing and Regeneration Act 2008. 27 This body replaced the Homes and Communities Agency in January 2018. 28 See Charities Act 2011, s 3 for the description of the 13 charitable purposes recognised at law. 29 Providing social housing or services to social housing providers would likely fall under one or more of the following charitable purposes set out in s 3 of the Charities Act 2011: s 3(2)(a) (prevention or relief of poverty), (j) (the relief of those in need), (e) (the advancement of citizenship or community development) and (d) (the advancement of health). 30 Charity Commission, ‘Guidance: Affordable Home Ownership: Charitable Status and Tax’ (­Charity Commission, last updated May 2009) 4. Other purposes may include relieving the needs of elderly or disabled persons.

Social Housing – Charities and Vulnerable Groups  283 the sector31 and in terms of the regulatory and legal background that governs the provision of social housing and the role of charities within it.32 Charities may have been registered housing providers, often (but not exclusively) small and serving the local community, while others may not have offered housing itself, but instead supplied management or specialist services to other providers. Where housing itself was provided, accommodation offered ranged from the most permanent permissible under law, to temporary accommodation to keep people off the streets. In terms of the charities’ client base, they could have been providers of general social housing or, more often than not, they provided the specialist services to vulnerable groups. It is also worth noting that social housing may be only one aspect of provision offered by charities as part of their charitable purposes, which, may for instance, have been focused on the relief of poverty more generally. It was as service providers and/or partners to other housing bodies and as direct service providers that the role of charities was best understood. It was also a finding of an ESRC research project33 that charitable social housing providers tended to be smaller scale, in terms of resources and properties managed, than private social housing providers. In the intervening years, charities have been forced to increasingly maintain specialist provision, as the social housing sector has homogenised due to financial and other pressures: Provision has become fragmented and lacking in coherence following the shift from local authorities housing individuals to the discharge of their duties through private registered providers. Market pressures have meant that larger providers have become general housing providers, leaving specialist services (such as housing the vulnerable with particular physical or mental health needs) to smaller, more specialised ­providers […] Charities are one such provider, stepping in to provide either specialist housing directly or supply specialised services to mainstream providers.34

C.  The Benefits and Challenges of Charitable Involvement in Social Housing The position of charities in social housing has been analysed in detail elsewhere.35 In short, the perceived benefits of charities involved in social housing include36 31 See Barr & Glover-Thomas, Housing the Mentally Vulnerable (2005) (n 17). 32 See, eg, the difficulties of the legal classification and regulation of different forms of tenure, explored in W Barr, ‘Charitable Lettings and their Legal Pitfalls’ in E Cooke (ed), Modern Studies in Property Law: Property 2000 (Oxford, Hart, 2001) 239–254; Carr et al, Closing the Gaps (2017) (n 5). 33 See Barr & Glover-Thomas (2005) (n 17). 34 W Barr, ‘The Big Society and Social Housing: Never the Twain Shall Meet?’ in N Hopkins (ed), Modern Studies in Property Law: Volume 7 (Oxford, Hart Publishing Ltd, 2013) ch 3, 42. 35 Glover-Thomas & Barr (2008) (n 19); Barr, ‘Charitable Lettings and their Legal Pitfalls’ (2001) (n 32). 36 Broader, societal benefits of charities generally, such as social capital and contribution to civil ­society, are important too.

284  Warren Barr that they are value-driven,37 trusted,38 responsive,39 and innovative in delivery.40 Charities also have local knowledge and a history of effective, multi-agency working to provide care and services,41 and are accountable, both to regulatory bodies and to the legal framework of rules that ensures they carry out charitable purposes for the public benefit. Charities working in social housing can raise funds to meet need through fundraising activities, and the new power of social investment42 also allows charities to raise additional funding, through mechanisms such as charity bonds, secured bank loans and social property funds.43 However, many of these perceived benefits are tested when charities are required to work at scale, such as in plugging major gaps in provision by becoming the predominant or only provider of a service, as this prevents innovation and responsiveness.44 Similarly, the fragility of funding, particularly through commission and close working with governments, may lead to a loss of independence and an undermining of public trust,45 as discussed in Chapter 11 in this volume. Funding of specialist services, such as housing support services, has been met through commissioning of public funds, such as historically, the Supporting People fund, and through charities’ traditional sources of income, including donations and fundraising activity. Funding is often precarious in the long term and can dictate the operational direction of housing and housing support activities.46 Of equal concern, charities have been beset by some serious, high-profile scandals, which have rocked public trust and confidence in the charity sector.47 The housing and homelessness charity, St Mungo’s, suffered a public relations crisis through working with government agencies. St Mungo’s, as one of the largest providers of homelessness outreach services in the UK, had worked with the Home Office Immigration, Compliance, Enforcement (ICE) teams as they went on the streets in order to search for, arrest and deport rough sleepers deemed to be in the UK illegally. This was despite a recent High Court challenge that ruled it unlawful to deport rough sleepers from countries in the European

37 Glover-Thomas & Barr (2008) (n 19) 184. 38 Ibid. 39 Glover-Thomas & Barr (2008) (n 19) 185. 40 Ibid. 41 Barr, ‘The Big Society and Social Housing’ (2013) (n 34) 45. 42 Introduced by The Charities (Protection and Social Investment) Act 2016, s 16. 43 See, eg, successful case studies such as St Mungo’s, which utilised social investment tools to buy properties to address homelessness in London: www.bigsocietycapital.com/what-we-do/investor/ case-studies/st-mungos. 44 See Barr, ‘The Big Society and Social Housing’ (2013) (n 34) 48–49. 45 Ibid, 48; Glover-Thomas & Barr (2008) (n 19) 194–5. 46 See Glover-Thomas & Barr, ‘Enabling or Disabling?’ (2009) (n 20). 47 See, eg, the high media profile collapse of the children’s charity, Kids Company: House of Commons Public Administration and Constitutional Affairs Committee, The Collapse of Kids Company: Lessons for Charity Trustees, Professional Firms, the Charity Commission, and Whitehall (HC 2015–16, 433).

Social Housing – Charities and Vulnerable Groups  285 Economic  Area.48 This does not detract, in the long term, from the good that charities such as St Mungo’s do in social housing, but it has the capacity to do so. It is clear, then, that while charities have the ability to be effective in social housing, there is no guarantee that they will be. To assess the continued contribution of charities to social housing, it is necessary to turn to an analysis of the tough, modern social housing environment.

III.  Contemporary Challenges Facing Charities in Meeting Need in Social Housing for Vulnerable Groups A.  Challenges in Social Housing Generally i.  The Decline of Social Housing It is a trite proposition that the social housing sector has been in decline.49 Demand far outstrips supply, due to the simple fact that governments have failed to build enough social homes every year, preferring instead to promote owneroccupation as the most appropriate route to house the majority of the populace.50 Unfortunately, home ownership has become unattainable for many due to prohibitive house prices, with the cost of housing rising faster than incomes. In 2017, the average home in England then cost eight times more to buy than the average annual pay packet.51 Mortgage finance cannot possibly fill that gap. This has led to a heavy reliance on the private rented sector, and the number living in the private rented sector has doubled in the past 20 years.52 Nonetheless, private renters were found to spend around 41 per cent of their household income on rent, and over 57 per cent of those in private rental said they struggled to meet housing costs.53 Those seeking social housing, are, by definition, unable to afford housing in the private sector and, even if rents were affordable, there is evidence which suggests that there may be widespread bias against letting properties to those claiming income support54 and families with young children.55

48 R v Gureckis [2017] EWHC 3298. 49 See, eg, Alder & Handy, Housing Associations: A Legal Handbook (2018) (n 14). 50 See, eg, MHCLG, National Planning Policy Framework (MHCLG, February 2019) para 64, which explicitly preferences low-cost home ownership schemes over social rental homes. 51 Shelter Commission report, ch 2, 74. 52 See above. 53 Shelter Commission report, ch 1. 54 Nearly one in three private renters said that they had been unable to secure a property in the last five years due to landlords adopting a ‘no DSS’ rule; 43% landlords surveyed said they operated an outright ban of this nature, with 18% saying they preferred not to, but occasionally did – see Shelter Commission report, ch 1, 61. 55 Ibid; almost 20% of landlords surveyed said they operate such a ban and 10% prefer not to let to families.

286  Warren Barr Social housing has been seen as a ‘residual ambulance service’56 for those in the highest need, with the Shelter Commission finding that investment into social housing has halved in real terms, with around 1.5 million fewer social homes in existence, from 1980. Indeed, less has been spent on housing, including benefits, than on defence, public order and safety, education, health and other welfare payments. The Shelter Commission recommendations are of a scale to address this decline and recapture the original purpose of social housing, which is described as an aspirational sector that provides opportunities to a wide range of people currently priced out of the private market. The main thrust of the recommendations57 is that more than three million homes need to be built in the next 20 years, at the rate of an average of around 15,000 social homes a year. These recommendations have been costed at up to £225 billion, offset by savings to the £21 billion annual housing benefit bill. The economic boost created by the programme means it would pay for itself inside 40 years, according to fiscal modelling for the Commission by Capital Economics. There is much more to the recommendations than building, including reducing stigma on social housing and altering the speculative nature of housing development. The scale of the proposed scheme highlights the scale of the challenges in the social housing market, which is simply no longer fit for purpose.

ii.  Ineffective Alternatives to Social Housing Social rented housing has also been squeezed by the advent of ‘Affordable Rent’ homes. Affordable Rent was seen a new way of financing social homes. The properties are made available at 80 per cent of market rent in the local area and are allocated in the same way as social housing. Some contracts may require landlords to re-let existing social housing at ‘Affordable Rents’. The extra money raised from Affordable Rent tenants should then be invested back into building more social homes. This, however, has not seen record levels of appropriate housing being built, with only 6,464 new social homes built last year, compared to a yearly a­ verage of 126,000 homes in the 1980s.58 Equally, ‘Affordable’ rents for typical two-bed properties work out at 30 per cent more expensive than social rents, amounting to £1,400 more per year on average.59 This is because social rents in social housing are calculated using a formula based on local incomes rather than market values, making social housing affordable by design. Currently, there are no plans for government to abandon the ‘Affordable Rent’ initiative, but these homes will remain out of reach of social housing tenants generally, and mentally vulnerable people more specifically, while market rents persist. 56 Ibid, ch 1. 57 Ibid, ch 9. 58 Ibid, ch 3. 59 Joseph Rowntree Foundation, ‘Affordable Rents compared to traditional social rents’ (Joseph Rowntree Foundation, 2018) www.jrf.org.uk/report/affordable-rents-compared-traditional-social-rents.

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iii.  Costs of Social Housing Development For charities (or any social housing provider) seeking to develop new homes, the cost of land is a major challenge, as the purchase or leasing of suitable land60 has been identified as usually the single biggest cost in building homes.61 The total value of residential land in the UK has exploded in recent years, rising by 583 per cent from 1995 to 2017,62 and land now accounts for 70 per cent of the cost of a market value of a home.63 One reason for this, in social housing, is that under the Land Compensation Act 1961, compensation for landowners now includes the value of the land along with the value of any planning permissions for market housing it might get in future, making it far more expensive to develop land for social housing.64 Developers, inevitably, charge as much as the government is willing to pay to secure land, driving up costs.65 This is seen as a significant barrier to building social homes, and the Shelter Commission, with support across the housing sector, recommends reform to the Land Compensation Act 1961 to reduce the price paid for social housing development to a fair market price, which would require not paying compensation for any future planning permission.66 At that time of writing, no such change is imminent. Another challenge for new development relates to funding, given the change many years ago from grant funding of new social housing to a process of commissioning67 or other forms of borrowing. Borrowing, which even in low interest loan situations requires repayment, is not a model to facilitate an a­ mbitious building programme. Hence, as the Shelter Commission suggests:68 To build genuinely affordable homes for low-income households to rent, providers require grant. As a recent technical report from the Greater London Authority outlines, even if providers maximise every other available funding stream, asset and mechanism for delivering social housing, a subsidy gap remains.69 Because the government has 60 Technically, one purchases an estate in land, commonly referred to as freehold or leasehold. It is also possible for land to be let or sublet by another agency, perhaps a local authority, to a social housing provider, or, indeed, for the social housing provider to simply be a licensee of premises with contractually defined rights. The differences between these forms of land holding are discussed in Barr (n 34) or any English land law textbook. 61 B Tanner, ‘Land reform foundation for a new generation of social housing’ (24 Housing, 17 June 2019) www.24housing.co.uk/news/land-reform-foundation-for-a-new-generation-of-social-housing/. 62 Office for National Statistics (ONS), ‘The UK national balance sheet: 2018 estimates’ (ONS, 2018) fig 2. 63 ONS, ‘The UK national balance sheet: 2017 estimates’ (ONS, 2017) fig 3. 64 T Aubrey, Gathering the windfall: how changing land law can unlock England’s housing supply potential, (Centre for Progressive Policy, 19 September 2018) 13. This was not the case before the Act came into force. 65 D Bentley, The Land Question: Fixing the dysfunction at the root of the housing crisis (Civitas, 2017) 48; N Keohane & N Broughton, ‘The Politics of Housing’ (National Housing Federation/Social Market Foundation, 2013) 49. 66 T Aubrey (n 64) 13. 67 The impact of commissioning on charities more generally is the subject of ch 11 in this book. 68 Shelter Commission report, ch 3, para 3.20. 69 Greater London Authority, The 2022–2032 Affordable Housing Funding Requirement for London Technical Report (Greater London Authority, June 2019).

288  Warren Barr access to the cheapest finance available, capital grant is the best existing mechanism available to the country to meet this subsidy gap.

The Shelter Commission report calls for a £12.8 billion annual investment in grants to build new social rent and sub-market homes by way of grant,70 which is necessary to support meaningful change in the status and availability of social housing. Needless to say, this would be a transformative level of investment. The leadership of Shelter demonstrates, again, the effectiveness and co-ordinating force of charities in seeking change. While social housing charities cannot, without the reforms noted above, change the nature of constraints on developing or improving social housing, the charity sector itself can assist in meeting challenges. The Charities Aid Foundation (CAF) Bank, for example, as of 28 Feb 2017, had lent more than £25 million to housing providers since 2015. This bank is 100 per cent owned by CAF and is driven by a social purpose, with over £1 billion of deposits. Being a charity, any profits are reinvested to help fund CAF’s work supporting the charitable sector. Moreover: CAF Bank is committed to building long-term partnerships with housing associations, based on a deep-rooted understanding of each organisation’s business model, financial position and vision for the future and we personally meet with every borrower.71

There are numerous examples provided by the Bank about successful housing projects carried out with assistance.72 This, of course, does not remove the issue of borrowing rather than grant, but it does at least provide a more bespoke service and access to funds. Similarly, the fact that investment decisions will be driven by adherence to the Bank’s charitable purposes rather than pursuit of profits illustrates that the charitable sector’s motivations are different from the private sector investors and align more closely with both the ethos of social housing and the needs of those client charities seeking to provide social housing services.

iv.  Housing Stock: Quality, Access and Homelessness It has already been rehearsed that demand far outstrips housing stock supply, and that waiting lists can stretch into years. There can be issues with the quality and suitability of housing stock within both the private and the social rented sector.73

70 Shelter Commission report, ch 3, para 3.21. 71 www.cafonline.org/caf-bank. 72 See, eg, the development of Walker Court, working with Dunbritton Housing Association: CAF, ‘How CAF Bank helped build homes for people in need’ (24 Housing, 28 February 2017) www.24housing.co.uk/yournews/how-caf-bank-helped-build-homes-for-people-in-need/; and with Glenn Housing Association (a charitable housing association) in Fife: www.cafonline.org/charities/ borrowing/secured-loans/case-studies/glen-housing/. 73 See M Smith, F Albanese & J Truder, A Roof Over My Head: the final report of the Sustain project, a longitudinal study of housing outcomes and wellbeing in private rented accommodation (London, Shelter and Crisis, 2014). Worryingly, people with mental health problems are overrepresented in this type of accommodation.

Social Housing – Charities and Vulnerable Groups  289 Overcrowding, in the sense of undesirable sharing of space, is a significant issue,74 as can being located in undesirable or unsafe neighbourhoods. Stock can also be in problematic states of repair, due to age of the property, lack of maintenance or other standards. This is a bigger issue in private rentals than social housing,75 and one response to this was to introduce the Decent Homes standard, which, in brief, was grouped around four main criteria: fitness of habitation, reasonable level of thermal comfort, reasonably modern facilities and services and reasonable state of repair. Unfortunately, the Grenfell Tower disaster demonstrates problems with the Decent Homes standard in practice, and although the outcome of that disaster was new legislation to improve tenant safety in premises, the devil is in the detail of enforcement of such standards. A report commissioned by Mind,76 for example, provides a case study of Crystal, who moved into a property said to meet the Decent Homes Standard, but work had not been completed. Her ­landlord’s response was to issue B&Q77 vouchers and ask that she fix the issues herself. Problems are widespread, and where property is not suitable, it is often difficult to get more appropriate property or to get landlords to take swift and appropriate action. Choice, in that sense, is an illusion in relation to social homes, as most local authorities have introduced a ‘three strikes’ rule that limits the number of properties that can be rejected by someone on the housing waiting list.78 This is a way of coping with the ever-increasing demand on access to social housing, but does not empower tenants to deal with conditions. Issues of access to housing have led to numerous attempts to control access and supply over the years, driven by duties to meet need. One example will suffice of the weakness of such allocation processes. The removal of the spare bedroom subsidy,79 or ‘Bedroom Tax’ as it became to be known, was designed to incentivise social renters who have a spare bedroom to move to a smaller home by reducing their housing benefit payments by 14 per cent. The issue, of course, was that allocation of housing had been on the basis of need, and that smaller properties were not often available for tenants to move to. The result was that more than half of affected renters saw their benefits cut rather than become homeless and some 76  per  cent of those people had to cut back on essentials such as food to meet rental payments.80 74 See Shelter Commission report, ch 1, which reports that 682,000 households live in overcrowded conditions, 7% of which are in social housing. 75 Ibid, 52. 76 See J Diggle et al, Brick by brick: A review of mental health and housing (London, Mind, 2017) ch 1, 11. 77 A nationwide hardware retail chain across the UK. 78 Diggle et al, Brick by brick (2017) (n 76) 18. 79 Introduced by the Welfare Reform Act 2012, s 11, alongside the corresponding changes to housing benefit under The Housing Benefit (Amendment) Regulations 2012, s 5(5). 80 Shelter Commission report; and Cambridge Centre for Housing and Planning Research & Ipsos MORI, ‘Evaluation of Removal of the Spare Room Subsidy’ (Department for Work and Pensions, 2015) www.cchpr.landecon.cam.ac.uk/Projects/Start-Year/2013/Spare-Room-Subsidy-Household-BenefitCap/Final-Report/Final-Report/.

290  Warren Barr The result of failure to access housing is that families will either have to be housed in temporary accommodation or be made homeless. It is clear that many households are now living in temporary accommodation, so are hidden from the homelessness statistics, even though they are housed in emergency hostels or sofasurfing between different friends. According to existing research, the numbers of households living in temporary accommodation had increased 10 per cent between the final quarter of 2015 and 2016, and of the 75,470 households so housed, 21,910 were housed outside their local area (an increase of 17 per cent year on year).81 Evidence suggests that these official statistics may be a significant underestimate.82 What is clear is that the amount local councils spend on temporary accommodation for households has increased by 71 per cent in the last five years and amounted to more than £996 million in 2017/18. Homelessness83 is an increasing problem and one that would need a chapter in itself to consider appropriately, as well as to consider and analyse the impact of legislative attempts to reduce the burden of homeless, such as the Homelessness Reduction Act 2017, or the duties to house the homeless,84 which differ depending on whether applicants are considered to be ‘intentionally homeless’ or not.85 It is sufficient to say that homelessness is a significant and growing problem in England (and the wider UK), with 277,000 people homeless in England alone.86 Projections suggest that the number will rise to include 133,000 more households if there is no significant change in housing investment, with a lack of social housing being a major contributor to that figure.87 Charities have been playing a role to ameliorate these issues about supply and quality. The Mind report, discussed above, is an example of how charities can draw attention to this area of social need through the campaigning element of their work. Many homelessness charities such as Shelter, Crisis and others also tirelessly push for changes in the law and policy to eradicate problems of homelessness.

v.  Local Housing Allowance (Housing Benefit) Problems One of the key triggers of homelessness is eviction from rent arrears,88 and one of the key drivers of rent arrears is problems with housing benefit payments.89 81 Diggle et al (2017) (n 76) ch 2, 20. 82 A Rose, C Maciver & B Davies, Nowhere Fast: The journey in and out of unsupported temporary accommodation (Manchester, IPPR North, 2016). 83 This is not to be equated simply with rough sleeping or ‘rooflessness’. 84 The principal duty falls under the Housing Act 1996, s 193. Discussion of special duties owed to the most vulnerable will be discussed below, in relation to the legal tests of eligibility. 85 A lesser duty to provide temporary accommodation is imposed for the intentionally homeless – see pt 7, Housing Act 1996 generally. 86 Shelter commission report, ch 1 & 4. 87 G Bramley, Homelessness Projections: Core Homeless in Great Britain, summary report (Crisis/ Herriot Watt University, 2017). These projections do not include those living in unsuitable, temporary accommodation, so actual projections may be higher. 88 Social housing tenants do have greater protection against eviction than other, private tenants generally – see Barr ‘Leases: rethinking possession against vulnerable groups’ (2007) (n 16).

Social Housing – Charities and Vulnerable Groups  291 Housing Benefit, or as it is now called, Local Housing Allowance rate, or the housing element of the Universal Credit system,90 is essential for social tenants/ households on low incomes to be able to access housing, as demonstrated by the fact that government spends £21 billion annually on Local Housing Allowance.91 Delays and other problems have been caused by the move to Universal Credit. The result is that low-income private renters who rely on housing benefit have found it increasingly difficult to find housing where their housing benefit covers the rent. Local Housing Allowance rates are now lower than the cost of a modest home in over 90 per cent of the country.92 Following large absolute cuts in 2011 to rates payable, rates increased slower than rents from 2013 and have been frozen since April 2016. Since this time, rents across the country have risen by a further 4 per cent, and even faster in some parts of the country.93 Matters are made worse by problems with the administration of the allowance: It is now a matter of accepted fact that the administration of Housing Benefit is both slow and unreliable […] The complexity of the process means that incorrect levels may be set at the outset, from which appeals are difficult, and there is clear evidence of regional variations in the efficiency and levels of benefit obtainable […] Such is the inconsistency that one County Court judge is on record as saying that he is more likely to trust a defendant who claims that a benefits claim has been lost than a Housing Benefit officer who claims otherwise.94

A lack of housing benefit does not lead to homelessness without eviction. However, as housing benefit provides a source of funding to maintain services (the rental payment), it is normally essential to most housing providers’ ability to continue to provide accommodation and/or services. For most charitable social landlords, regaining possession of premises through eviction is an emotive topic, and there is a real tension between their social housing function and the need to regain possession in certain circumstances. Sometimes eviction is sought to move someone on to a new, more suitable scheme. This may be in the objective best interests of both the vulnerable individual and the provider where there is unmanageable behaviour that is impacting on the safety and wellbeing of other residents or the local community.95 In this respect, having a method to However, flexible tenancies of two years’ duration and introductory tenancies, introduced by the ­Localism Act 2011, s 154 (adding s 107A to the Housing Act 1985) do allow for evictions to happen more easily. This was introduced to help reduce waiting lists – see, generally, B Lund, Understanding Housing Policy, 2nd edn (Bristol, The Policy Press, 2011). 89 See Barr (2007) (n 16). 90 The system is confusing, but in essence Universal Credit covers most housing needs except for those of people living in supported or sheltered housing, or accessing temporary or emergency housing, who must instead claim housing benefit – see Welfare Reform Act 2012, s 11. 91 Shelter Commission report, ch 1. This includes private renters and over 1,279,868 households. 92 Chartered Institute of Housing (CIH), ‘30 percentile rents. Missing the target? Is targeted affordability funding doing its job?’ (CIH, 2018). 93 From April 2016 to October 2018, rents increased by 4 per cent in England: ONS, ‘Index of Private Housing Rental Prices, UK: monthly estimates’ (ONS, September 2018). 94 See Barr (2007) (n 16) 124. 95 Ibid, 136–138.

292  Warren Barr move someone on from a tenancy through the legal process of eviction is required, even though it might seem antithetical to the purpose of social housing.96 There must be robust post-eviction strategies, so that these people do not simply become homeless, and that referrals to other services take place: In rethinking possession against vulnerable adults, providers not only should look well beyond their reactive legal right to possession and have robust strategies to prevent the causes of repossession, but also should have equally robust post-eviction strategies to deal with those situations where eviction is necessary. Eviction should be part of a continuing obligation, not the end of all obligations.97

This is easy to state but may not be easy to achieve successfully in practice, given that there may not be adequate or suitable alternative housing available to meet new needs, or due to the complexities and issues of working with the multiple agencies often required to deliver needed support.98

vi.  Regulatory Issues and Tenant Voice With the decline of the social housing sector, there is a parallel argument, which is hard to contest, that the law relating to social housing is incoherent; the law lacks conceptual clarity in terms of having multiple drivers but no overreaching purpose.99 It is therefore unsurprising that the regulatory framework is similarly piecemeal and not thought through.100 In terms of the main regulator, the Homes and Community Agency (HCA) was concerned primarily with funding new housing and monitoring regulatory standards.101 Originally, these did not include fitness for habitation, but there is now a new standard for health and safety in property through the Homes (Fitness for Human Habitation) Act 2019. The efficacy of the HCA in driving new homes has already been shown to be questionable, as demonstrated by the stark figures of the decline of social housing stock. It should come as no surprise, then, that the Shelter Commission recommends the creation of a new, separate and independent regulator of social housing.102 Whether this, if adopted by government, would solve problems is a moot point, as without appropriate

96 The unhappy situation for charities managing property can best be demonstrated by the difficulties caused in Bruton v London Quadrant Housing Trust [2000] 1 AC 406, where a charity hoping to use a licence was unable so to do and found that it granted a contractual tenancy and was frustrated in its purpose of proving temporary accommodation – see Barr (2001) (n 32) for analysis. 97 See Barr (2007) (n 16) 142. 98 Ibid. 99 This is to be compared with the development of the social housing sector at the outset, which was driven by Victorian concerns of promoting public health – see Carr et al (2017) (n 5) 5. 100 Ibid, 7. 101 This included a ‘Tenant Involvement and Empowerment Standard’ to involve tenants in the management of their homes, and a Home Standard. The latter, not to be confused with any legal requirement of fitness for human habitation, was instead to make sure that homes met the Decent Homes standard discussed above. 102 Shelter Commission report, ch 9, 212.

Social Housing – Charities and Vulnerable Groups  293 resourcing, similar regulatory criticisms may be levelled at this r­egulator as are currently levelled at the charity regulator, the Charity Commission, for failure to intervene in all cases.103 There is another driver, which is that social housing tenants report themselves as feeling disempowered and unable to influence control over their homes.104 They also report stigma as an issue, particularly for those with mental health issues: ‘People with mental health problems face further barriers to accessing appropriate accommodation due to stigma, discrimination, and poverty’.105 An independent regulator might better address this, but stigma is a cultural issue that can only be addressed through a culture shift in views of social housing and social housing tenants.106 Charities are well placed to campaign and amplify the voice of social tenants to help address stigma in the communities in which they work.

B.  Particular Challenges for Charities Working with Mentally Vulnerable Tenants The challenges facing any organisation involved in social housing are clearly significant. For charities and other specialist providers working with mentally vulnerable tenants, there are some additional challenges to address. The following treatment is not intended to be exhaustive, but to highlight some key areas.

i.  The Relationship between Mental Health and Housing Tenure It is clear that many interrelated factors underpin the impact of housing on mental health. Research by Mind, a mental health charity, noted that these included (i) the physical condition of the property;107 (ii) affordability of rent;108 (iii) physical security,109 (iv) social connections with neighbours;110 and (v) the impact of housing on identity and self-esteem.111 It is clear from the above discussion that the 103 See, eg, National Audit Office, The Regulatory Effectiveness of the Charity Commission (HC 2013–14, 813) para 1.12. 104 Shelter Commission report, chs 1 & 4. 105 Diggle et al (2017) (n 76) ch 2, 17. 106 Shelter Commission report. 107 M Gibson et al, ‘Housing and Health Inequalities: A synthesis of systematic reviews of interventions aimed at different pathways linking housing and health’ (2011) 17 Health & Place 175. 108 R Bentley et al, ‘Association Between Housing Affordability and Mental Health: A longitudinal analysis of a nationally representative household survey in Australia’ (2011) American Journal of Epidemiology 753. 109 M Barnes et al, People Living in Bad Housing: Numbers and Health Impacts (London, National Centre for Social Research, 2013). 110 S Oishi, ‘The Psychology of Residential Mobility: Implications for the self, social relationships, and well-being’ (2010) Perspectives on Psychological Science 5. 111 GW Evans, NM Wells & A Moch, ‘Housing and Mental Health: A review of the evidence and a methodological and conceptual critique’ (2003) 59 Journal of Social Issues 475.

294  Warren Barr general state of the social housing sector would seem to be working against rather than promoting good mental health. The position is complex, but high quality, stable housing is important to maintaining good mental health and for recovery of someone has developed a mental health problem.112 One key aspect of stable housing is length of tenure. Homes for lifetimes, a feature of social housing provision in the past, are no longer permissible. The combined effect of the Localism Act 2011, section 154113 and the Housing and Planning Act 2016, schedule 7(4) removed the ability of social landlords to offer lifetime tenancies, which requires that normally a tenancy of no more than five years will be offered to new applicants to social housing and that the maximum period of a tenancy is 10 years. Sections 81A(1)–(3) of the Housing Act 1985 state that these fixed term tenancies should be from two up to a maximum of 10 years, or where a child under nine years old is resident, the tenancy can continue until that child turns 19. Additionally, many tenants will start out under an ‘introductory tenancy’ for the first year of their flexible tenancy. This year acts as a probationary period for new tenants and the terms under the introductory tenancy tend to make evicting tenants who breach their tenancy agreements much simpler.114 These tenure provisions seem at odds with the needs of vulnerable people, but the legal frameworks remain and cannot be avoided.115 It is, as we have seen above, an issue of trying to make the best of limited supply. Charities have to work within this scheme, but, as with the approach to eviction, they can leverage their ability to work in the local community and across multiple agencies to make sure that referrals are made to supportive services so that support is in place. It is acknowledged that there are problems with multi-agency working and issues of variability,116 but charities are focused within communities and their adherence to their purposes mean that they are, perhaps, better placed to make this work. It must be remembered again that, as with eviction, not every referral is motivated by negative reasons. There may be times, in the best interests of the charity carrying out its particular charitable purpose, when the person has to move rather than the service, due to the restraints and fragmented nature of provision. A vulnerable person’s needs, for example, may have outgrown the services offered in that particular social housing arrangement, or they might be ready to move to a less supported environment. This is where the importance of floating support, appropriate to the person or family housed, can be crucial.

112 T Kyle & JR Dunn, ‘Effects of housing circumstances on health, quality of life and healthcare use for people with severe mental illness: a review’ (2008) 16 Health and Social Care in the Community 1. 113 This section adds s 107A to the Housing Act 1995. 114 This issue was mentioned above. 115 Eg, s 81A(4) of the Housing Act 1985 requires that any secure tenancy granted in breach of sub-s (1) will be converted into a fixed term tenancy of five years. 116 Glover-Thomas & Barr, (2008) (n 19); (2009) (n 20).

Social Housing – Charities and Vulnerable Groups  295

ii.  Meeting Costs of Supporting Mental Health Services: Floating Support and Supported Housing It has already been said that support services can be essential to help those with mental health problems manage their accommodation and live independently and exclusively in the community, but this is expensive and funding is scarce. Much of this support, given the turnover of tenancies, is known as ‘floating support’. However: ‘There is a lot of variation in the provision and nature of housing support services – particularly floating support. In particular, the duration and frequency of support is different between areas. The level of mental health expertise also differs markedly’.117 Providers have to do more with less, as the budgets for floating support have also been significantly reduced in recent years.118 Supported housing is harder to define,119 but the common feature tends to be an integrated package of housing, support and care that aims to promote independence. It is seen as essential to keeping those with more acute mental health conditions out of hospital and out of danger, as well as in a social home.120 Successful supported housing schemes include, as features, choice and flexibility of the support on offer, in a safe and stable environment.121 There is a complex funding model for mental-health-specific supported housing, and funding is being cut in real terms, including the lifeline of ‘Supporting People’ funding from local authorities. This funding stream has been replaced by the Housing Related Support Scheme.122 This is often provided by charities, but it is not available across the country, and support will vary across regions.123 It is an expensive model to facilitate. This is an additional cost to run, but one that charities are well placed to do, in the sense that they may be able to meet additional costs or close the gap through fundraising activities.124

iii.  Additional Housing Duties for Vulnerable Homeless People Up to this point, not much has been said about access to social housing through the mechanisms used to provide housing to those who need it most.125 One element of this tapestry of allocation should be considered by way of example, and that relates 117 Shelter commission report, ch 3, 32. 118 Housing Associations Charitable Trust, ‘Making the Difference: Reducing the social exclusion of older people with mental health problems’ (London, Housing Association Charitable Trust, 2015). 119 Homeless Link ‘Future Focus: A framework to shape the funding of sustainable supported housing services’ (London, Homeless Link, 2017). 120 Diggle et al (2017) (n 76) 33. 121 J Boardman, ‘More Than Shelter: Supported accommodation and mental health’ (London, Centre for Mental Health, 2016). 122 Care Act 2014. 123 Diggle et al (2017) (n 76) 33. 124 Glover-Thomas & Barr (2008) (n 19). 125 Generally, see Alder & Handy (2018) (n 14).

296  Warren Barr to duties owed to homeless persons. In order to be eligible for housing assistance, those who are under threat of homelessness are required to pass a Part VII (of the Housing Act 1996) assessment. Hence, under section 193 of the Housing Act, a claimant must be eligible for assistance, homeless, possess a local connection, be in priority need and not be intentionally homeless. The ‘priority need’ aspect is determined by section 189 of the Act, and one of the criteria listed is someone who is vulnerable, which includes someone suffering from a mental illness.126 The current legal test as to whether someone is vulnerable can be found in the speech of Lord Neuberger in Hotak v London Borough of Southwark:127 Accordingly, I consider that, in order to decide whether an applicant falls within section 189(1)(c), an authority or reviewing officer should compare him with an ordinary person, but an ordinary person if made homeless, not an ordinary actual homeless person.128

In spite of the importance of considering vulnerability, these assessments, it appears, are usually made on the basis of written evidence submitted by the local authority, rather than a personal assessment,129 and by someone with no expertise in mental health.130 Charities and others have attempted to co-locate trained mental health professionals alongside those making decisions, but the impact of this is limited by allocation policies and a lack of housing stock.131

iv.  Access to Justice: Loss of Legal Aid Applying for social housing can be particularly challenging for those with mental vulnerabilities132 or where carers are applying on someone else’s behalf.133 The complexity of issues, including navigating the differing rules relating to tenure and the respective rights granted, as well as the systems for allocation to social housing, makes sourcing free, appropriate and accurate legal advice difficult. Similarly, many vulnerable tenants are detrimentally affected in their ability to challenge their landlords about conditions in their homes. Indeed, this has led to the worrying trend that some landlords in the private rented sector actively encourage lettings to vulnerable tenants, on the basis that they are less likely or

126 Housing Act 1986, s 189(1)(c). Under the 2017 Act, all must be assessed, irrespective of priority need. 127 [2015] UKSC 30. 128 Ibid [58]. This clarified the earlier judgment of Hobhouse LJ in R v Camden LBC ex parte Pereira (1999) 31 HLR 317. 129 C Hunter, ‘Denying the severity of mental health problems to deny rights to the homeless’, (2008) 2 People, Place and Policy Online, 17. 130 Shelter commission report, ch 2, 18. 131 Ibid, 18. 132 Diggle et al (2017) (n 76) ch 2, 18. 133 DA Copeland & MV Heilemann, ‘Choosing “The Best of the Hells”: Mothers face housing dilemmas for their adult children with mental illness and a history of violence.’ (2011) 21 Qualitative Health Research 520.

Social Housing – Charities and Vulnerable Groups  297 financially able to complain. Carr et al uncovered this trend, evidenced by one of their surveyor respondents in the research: Some landlords (I know of two in my town) specialise in housing vulnerable individuals, not because they want to help, but because they are easier to exploit. One of those landlords has since been prosecuted but the problems went on for years before it got to that point.134

Legal representation would assist here. Unfortunately, these aspects of access to justice have been made considerably more difficult by the swingeing cuts to legal aid made under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). For present purposes, from April 2013, LASPO 2012, section 8 and schedule 1 mean that legal aid advice is no longer available for all welfare benefit matters and all housing cases except those that involve disrepair issues that pose a serious threat to health, or where a person’s home is classified at being at ‘immediate risk’, such as in relation to eviction proceedings or assistance with homelessness.135 This has had a huge impact on charities as well as other bodies,136 and it is clear that many charitable social housing providers or providers of supporting services have had to either add an advice function themselves, or put in place a robust referral process to a local charity who can offer some advice functions. This, of course, is no substitute for specialist legal advice from professional advisors, and it has not proved possible to properly compensate for the loss of legal aid funding, as evidenced by a study conducted in 2017, which concluded that some geographic areas have become ‘advice deserts’: In some areas of the country, there is a dearth of solicitors with housing contracts for legal aid. This is an unsustainable position. Telephone advice, which is the first port of call for many, is a poor substitute for face-to-face provision by an expert in housing law. This is most particularly because […] the law is complex and in key areas uncertain.137

In many cases, the concern is that legal aid is so limited that enforcement by tenants of their rights or accessing housing becomes symbolic rather than real, particularly as vulnerable tenants are unlikely to be able to act as litigants in person, due to the complexities of the claim. This is a grave situation, and one that occurs in practice as well as in theory. In Festival Housing Limited v Baker,138 for example, which concerned breach of an injunction against begging by a social housing resident, District Judge McKenzie was scathing of the situation: I am disturbed and concerned that Ms Baker attends before me today without the assistance of any public funding or a solicitor […] Ms Baker is a fragile individual; has 134 Carr et al (2017) (n5) 9. 135 Hence, perversely, there is no legal aid for advice around housing benefit or the housing portion of Universal credit to prevent threatened eviction, but at the crisis point of eviction such aid may be available, although that in practice is often too late – see D Morris & W Barr, ‘The impact of cuts in legal aid funding on charities’ (2013) 35 Journal of Social Welfare and Family Law 79, 84. 136 On the impacts for the charity sector more generally, see Morris & Barr (ibid). 137 Carr et al (2017) (n 5) 11. 138 [2017] EW Misc 4 (CC)

298  Warren Barr difficulty reading and writing; difficulty in understanding, though I have no evidence or indication to indicate to me that she lacks capacity to deal with matters […] It is wholly unsatisfactory that the system conspires against a vulnerable individual like this, so that she cannot get the legal aid and solicitor assistance that she really needs.139

Charities do what they can, including campaigning for legal aid to be reintroduced for such matters. As noted by Shelter’s response to the MHCLG Social Housing Green Paper consultation: [A]dvice on landlord and tenant issues is no longer available on legal aid, despite the abundant evidence that such provision would result in substantial savings to the court system and other statutory agencies such as social services further down the line. It is imperative that the current MoJ Review of LASPO should result in the restoration of legal aid for early advice on housing problems.140

Charities, and others, will continue to campaign to have funding restored for the protection of social homes, but time will tell.

IV. Conclusions It should be clear by now that charities remain key players in social housing provision for vulnerable people and have to weather the same challenges as any other provider of social housing. They provide a lifeline for many who are most in need, and have to do so in a tough and challenging environment. In that sense, their historic role in the sector continues, and has evolved and continued to meet need within the crisis that the social housing sector now finds itself in. The major, and perhaps underappreciated, strength of charities’ involvement in social housing for vulnerable people is not in mainline provision, but in the campaigning141 and advocacy function charities bring to improve the provision of social housing. It is obvious that the problems of social housing cannot be addressed without significant government investment, and campaigning can draw attention to the depth of the need. Charities’ power to unify voices and promote change is exemplified by the Shelter Commission, which drew together, with cross-party support, such a comprehensive survey of social housing and laid down the challenge to government. This also demonstrates the galvanising strength of charities; their ability to work across the political and policy spectrum to reach possible solutions for the furtherance of their purposes. Similarly, much of the

139 Ibid, per Mackenzie J at [2], [8]–[9]. 140 D Garvie, ‘Consultation Response, MHCLG Social Housing Green Paper: A new deal for social housing’ (Shelter, February 2019) 13. 141 Charities are not completely free to campaign, purely for political purposes or simply for changes in the law. This is not an outright ban and it is permissible to advance charitable purposes through campaigning – see Pearce & Barr (2018) (n 22) ch 16, particularly 395–400 in relation to political (policy) campaigning.

Social Housing – Charities and Vulnerable Groups  299 research cited in this chapter has come from charitable sources, such as Mind in its mission to support those with mental health needs, and Crisis and Shelter in addressing concerns over homelessness and issues of access to justice. Charities, by working either locally or nationally in dealing with housing issues, can amplify their vulnerable clients’ voices in policy making, which could otherwise be lost. Other third sector organisations, such as not-for-profit companies and socially responsible companies, could (and should) invest in providing social housing and housing services, but their assets are not locked to a set of charitable purposes regulated by law. There is, of course, a difference between effective advocacy and actual change. It would be overly optimistic to believe that the core of the Shelter Commission’s major sea-change programme will ever be actioned. Other, higher-profile, sectors of the welfare system, such as the National Health Service, are also struggling, and the UK is, at the time of writing, bracing itself for the economic and political impacts of ‘Brexit’, which will see the UK leave the European Union in early 2020. The Shelter Commission findings, though, should be hard to ignore and may lead to some action, perhaps on a smaller scale, to address concerns. In providing a position piece and getting the conversation to take place with government and policy makers, this is already a significant achievement. It provides a ringing endorsement of why charities should continue to act in social housing for the vulnerable, as their advocacy can lead to improvements to the sector, in addition to their frontline provision meeting the housing needs of the vulnerable. Time will tell if the rot in social housing can be properly addressed, but it is heartening to know that charities will continue to push for necessary change and evolve the effectiveness of the sector from within, in pursuit of charitable purposes.

300

14 Charity Law and Policy: Looking Forward JENNIFER SIGAFOOS AND JOHN PICTON

I.  Researching the Regulatory State At one point in the not-so-extensive history of nonprofit research in law, traditional precedential analysis made up the staple of academic work.1 But over time, the case-based method has ceded significant ground to a different type of research, one which has a focus on the nature of regulation, regulatory agencies and – crucially – the relationship between nonprofits and the state.2 In explaining this shift in research focus, it would also be wrong to say that traditional nonprofit cases, often located in trust law, no longer come before the courts – although they no longer stream out of the doors as they once did. It would also be wrong to say that they are old-fashioned or removed from the concerns of the contemporary sector. Modern cases have facts that strike a chord with the contemporary world. To take one example, in Phillips v Royal Society for the Protection of Birds,3 a testator, who was apparently an animal lover, made a specific bequest of her pet parrot, and then left a part of her estate to an owl sanctuary. Unfortunately, that sanctuary was in the process of winding up at the time of her death. Its closure appears to have been linked to a BBC investigation focusing on the killing of the birds to avoid veterinary fees. If the gift had failed, 16 relatives, none of whom appear to have been very close to the testator, stood to achieve a share. Such a set of circumstances is undoubtedly modern, if a little unusual, revealing a great deal about donative motivation and the reasons that cases come to court. At the same time, in saving the gift for charity, the court used timeworn charitable principles to modern effect. 1 For pioneering concept-driven precedential work, see EL Fisch, ‘The Cy Pres Doctrine and Changing Philosophies’ (1952) 51 Michigan Law Review 375. For an elegant mid-twentieth example of precedential writing, see C Crowther, Religious Trusts (Oxford, George Ronald, 1954). 2 An indication of coming change was W Beveridge, Voluntary Action: A Report on Methods of Social Advance (London, George Allen & Unwin, 1948), where nonprofit law is assessed in the context of an expanded welfare state. 3 Phillips v Royal Society for the Protection of Birds [2012] EWHC 618 (Ch), [2012] WTLR 89.

302  Jennifer Sigafoos and John Picton There are also some heavy storm clouds brewing in trust-relevant fields – and these are complex clouds of just the type that precedent-based researchers like. In the US, for example, there is now considerable interest in the regulatory challenges posed by charitable donor-advised funds.4 The concept behind these arrangements is that donors hand over formal control of capital to an investment fund, providing an efficient way to dispose of tax inefficient assets. Yet the very same donors continue to informally direct the fund on how their capital should be dispersed. Such a system, in which donors feel a moral right to control wealth but have no strict legal control over it, seems almost guaranteed, over time, to create litigation. Complex nonprofit issues, of the type that generate case-law, are likely also to arise simply from the enormous amount of philanthropic wealth held by a new class of ‘venture capitalists with a conscience’. This has already been seen in the English case, Lehtimaki v The Children’s Investment Fund Foundation,5 which turned on whether an independent member of a jointly-founded charity fund, set up by an ultra-wealthy divorcing couple, could be compelled to transfer £280 million to the wife’s new nonprofit. That is certainly a divorce with a difference. In consequence, it cannot be said that judicial precedents have become irrelevant in nonprofit research. They still form the basis of some serious modern legal-conceptual challenges and pose interesting research questions relating to who generates the case law and whose purposes it serves. In this volume, John Picton in Chapter 4 analyses many old wills cases – which form the basis of the rule that established charities last forever – to assess the motivations behind establishing charities that last forever. And John Tribe in Chapter 5 proposes that old trust concepts should be adapted to the dramatic and modern context of charitable corporate insolvency. Jennifer Sigafoos in Chapter 6 analyses Catholic Care (Diocese of Leeds) v The Charity Commission for England and Wales,6 a case with a distinctly modern policy fault line, to illustrate how courts have struggled to adapt to modern statutory law in charity law cases. Adam Parachin in Chapter 7 looks deep into the law’s precedent-based focus on charitable purposes in order to argue that the conceptual legal structure makes it difficult to regulate charitable activities. What has changed, and what much research into nonprofit law now reflects, is that the non-judicial branches of the state have a very great interest in charity. Precedent no longer rules the roost, and nonprofit law is no longer an entirely judicial creation. The grandfather of the regulatory agencies is the Charity Commission for England and Wales (‘the Commission’). Its role has changed over time. At the advent of the Charities Act 1960, which established the register of charities in England and Wales, nonprofits were still seen as somewhat peripheral, and the 4 See, eg, R Colinvaux, ‘Donor Advised Funds: Charitable Spending Vehicles for 21st Century Philanthropy’ (2017) 92 Washington Law Review 39. 5 Lehtimaki v The Children’s Investment Fund Foundation [2018] EWCA Civ 1605. 6 Catholic Care (Diocese of Leeds) v The Charity Commission for England and Wales [2010] EWHC 520 (Ch), [2010] 4 All ER 1041.

Charity Law and Policy: Looking Forward  303 modern world of regulation and guidance was still a long way off. Back then, nonprofits played second fiddle to a muscular welfare state, which was thought to have largely displaced the need for charity. Written in the 1960s, David Owen’s English Philanthropy charts a world in which nonprofits are relatively independent from government, but also not treated as politically important.7 He presents charities as ‘Junior Partner[s] in the Welfare Firm’, and as ‘Auxiliaries of the Welfare State’. At this time, the state did not think to intervene greatly with nonprofits, preferring instead to let them mop up the residue of social challenges that it did not, or could not, deal with directly. Nowadays, no-one would call the nonprofit sector an ‘auxiliary’. The modern state cares very deeply about what nonprofits do, and crucially, it is prepared to intensively monitor them.8 Nonprofits are now wrapped up in the regulatory state, the mass of rules and regulations that frame the way government works and delivers welfare. In turn, it is the nature of that regulatory state which has become a core focus for nonprofit research. In Chapter 2, Matthew Harding theorises as beneficial the diverse range of altruistic goods that independent charities might produce, but notes that where government seeks to control nonprofits through contractual funding arrangements, there is a risk that their character might change. Debra Morris in Chapter 11 also charts this change, weighing carefully the development of Payment by Results contracting and the risk that nonprofits might lose their independent voices. Much nonprofit research has become focused on regulation – a web of different agencies, statutes, soft rules, hard rules, and downloadable guidance. This is the brave new world that Oonagh Breen analyses in Chapter 8. It is also true of the tightly regulated and under-funded housing sector described by Warren Barr in Chapter 13. This is a new research-world, a place of compulsory registration for nonprofits, and jostling regulatory agencies working together – or attempting to work together – in complex systems. There is in place a new regulatory-world that still nods to the old will trust cases, as they are summarised and digested in regulatory guidance, but it is also distinct from it, being far less dependent on precedent and more concerned with the efficient management of bureaucracy. A new research space has opened up, analysing the relationship between nonprofits and the state.

II.  Nonprofit Controversy within the Regulatory State Even as new academic ground has opened, it cannot be said to be a happy terrain that has been revealed. The state’s relationship with nonprofits has proved to be controversial. In England and Wales, the charity sector has been beset by dramatic scandals. 7 David Owen, English Philanthropy: 1660–1960 (Oxford, Oxford University Press, 1965). 8 This is certainly not just an English phenomenon. See O Breen, A Dunn & Mark Sidel, Regulatory Waves (Cambridge, Cambridge University Press, 2017).

304  Jennifer Sigafoos and John Picton The scandals are not where they might be expected. Few people have problems with the regulator itself. The Commission is reasonably transparent. Although far fewer cases have gone up into the tribunal system than was anticipated when that route of appeal against Commission decisions was initially opened up,9 those cases that have been heard place a check on Commission power. There is no widespread disquiet against the regulator. As Eddy Hogg notes in Chapter 10, most people are happy not to know too much about the system, so long as they can be sure that there is one in place. It is also only fair to acknowledge that the regulator has a great deal on its hands, as Matthew Shillito demonstrates in Chapter 12, the boundaries of sectoral regulation are flexible and fast-changing. Instead, controversy relates to the nature of nonprofit links with the state, which has an ultimate responsibility for the delivery of essential welfare services. In the summer of 2015, news reports were dominated by the dramatic collapse of Kids Company, a very well-known nonprofit, whose charismatic founder – Camilla Batmanghelidjh – had long been a household name in the UK. She had influence at the very highest level of government, representing her child welfare organisation which focused on a very poor area of South London. Batmanghelidjh had been particularly well connected with the former Prime Minister, David Cameron. In her book, Kids,10 Batmangheldjh says directly that she was a: ‘politically desirable product of the Big Society Agenda’.11 Or, put another way, her nonprofit was a key element in the former Prime Minister’s policy plans to enlarge the role of charities in state welfare delivery. Bringing charities directly into essential state welfare provision is a risky business. When Kids Company fell apart, unable to balance its books, the press had a field day. Allegations, denied by the founder, poured forth in the newspapers about extravagant uses of the nonprofit’s funds, such as giving away money directly to clients, or using nonprofit money to buy luxury items, such as trainers, for individual children. The Kids Company insolvency raised policy questions about the relationship of the nonprofit sector to the state. The most obvious questions turned on why and how the government had funded an organisation which, upon its insolvency, appeared to be chaotically run and lacking in charitable reserves.12 But with hindsight, it is possible to understand why Kids Company seemed so attractive to government. It was, before its collapse, a high-profile child welfare organisation. It provided free meals, community support, and education to very poor children. It appeared to have many of the positive characteristics that are said, in theory, to

9 See B Crumley & J Picton, ‘Still Standing? Cy-près and Charitable Service Users in the First-tier Tribunal (Charity)’ (2018) 82 Conveyancer and Property Law 262. 10 C. Batmanghelidjh, Kids (London, Biteback, 2017). 11 Ibid, 346. 12 See: House of Commons Public Administration and Constitutional Affairs Committee, The Collapse of Kids Company: Lessons for Charity Trustees, Professional Firms, the Charity Commission and Whitehall (HC 2015–2016, 433).

Charity Law and Policy: Looking Forward  305 be unique to nonprofits. The organisation, although undoubtedly flawed, was in many ways dynamic and innovative. For example, it used art to help very disadvantaged children develop, and there can be no doubt that it was a mission-based nonprofit, seeking energetically to change the world. The problem – the cause of public anger – was not that such an organisation might exist, or even that it could close down, but rather that it should be in largescale receipt of public funds, and that those funds were badly spent. Some of the most bitter claims were that Kids Company had been well-favoured with money at a time when state social services were being rolled back. And so, this was not a direct regulatory problem, even if it is true that Kids Company should have had a much better financial reserves policy. There was no anger at the system of legal rules and guidance which regulate nonprofits per se. There was no anger at the Charity Commission either. When distilled and reflected upon, it can be seen that public anger flowed from a perceived problem relating to the relationship that the organisation had with the state. The bad feeling and surprise at the organisation’s shock closure stemmed from the fact that a risky organisation like Kids Company, working in partnership with government, was being relied upon to deliver the most essential type of service – ie child welfare provision. Nonprofits can be highly dynamic. Having a spirit and ethos of their own, they might capture the commitment of workers, whether voluntary or otherwise. They might innovate in ways that bureaucracies find difficult to do. Patrick Ford in Chapter 9 notes that the continued popularity of the independent school sector in Scotland can be attributed in part to failings on the part of the state to deliver adequate quality secondary education. But the cost of this innovative and sometimes idiosyncratic character of nonprofits is risk. Organisations that are given the freedom to do as they think best will often make mistakes. This means that the regulatory state, which is responsible for the delivery of welfare, has a dilemma. It can fund high-risk organisations, or it can attempt to tie them down tightly with regulation to ensure that money is well spent. The Kids Company scandal can be understood as an example of the first option – giving a risky organisation free rein. There is no doubt that Kids Company was an unusual organisation, or that its founder was a risk-taker. It was that dynamic brand which had attracted the attention of government in the first place. The second side of the dilemma for the state – the temptation to heavily regulate nonprofits – is shown by the even more troubling scandal at St Mungo’s Community Housing Association. That nonprofit is a very large rough sleeper charity. A series of reports in The Guardian newspaper revealed it to be caught up as a player in the government’s hostile environment policy,13 which is designed to make life as tough as possible for illegal immigrants. Proceeding on the basis,

13 See, eg, J Picton, ‘Making a Profit from Rough Sleepers: The Perils of Social Impact Bonds’ The Guardian (London, 10 May 2018) www.theguardian.com/voluntary-sector-network/2018/may/10/ making-profit-rough-sleepers-perils-social-investment.

306  Jennifer Sigafoos and John Picton since ruled unlawful, that EU citizens who were also rough sleepers had no right to be in the UK,14 the Home Office sought, in conjunction with local government in London, to collect data as to the whereabouts of homeless people, so that they might be removed from the country. St Mungo’s, ostensibly a constitutionally independent organisation, co-operated with government to pass on the details of certain people within its client base. Its outreach workers were seen working with Home Office officials out on the streets. That a large and influential nonprofit should get involved in activities that are fundamentally against the interests of its clients is unsettling. At the level of theory, this ought not to happen. Nonprofits are said to have a democratic function in representing the needs of their clients to government. The reasons that St Mungo’s became involved in deportation are complex, but directly connected to its relationship with the regulatory state. The nonprofit was in a Payment by Results contract agreement with local government in London, such as those discussed by Morris in Chapter 11. That contract – a social impact bond – was designed to deliver profits to investors based on the number of people removed from the streets. Within this profit-incentivised frame, the deportation of potentially extremely vulnerable clients became a method to achieve St Mungo’s contractual goals. The problems at St Mungo’s were the opposite of those at Kids Company. The homelessness nonprofit, through its social impact bond, was kept on an extremely tight regulatory leash. This had the effect that it was unable to serve the best interests of its client group. It was directly incentivised not to do so. By contrast, at Kids Company, the organisation was well funded and largely left to its own devices – a scenario which eventually led to the collapse of an organisation providing essential services to London’s poorest, and the apparent waste of funds devoted to welfare provision. Yet these two cases pose a challenge to nonprofit researchers: is there a healthy middle ground? As the state has deliberately become more and more reliant on nonprofits, it seems very unlikely that the scandals will go away. Either the state will seem negligent in funding essentially risky organisations, as in the case of Kids Company, or if it attempts to control individual nonprofits, it will be seen to smother their moral spirit, as in the case of St Mungo’s. In answering the question, it is necessary for researchers to think very carefully about the role of the Commission in regulating a very diverse sector. Specifically, when the government makes such diverse and unpredictable demands of nonprofits, is it possible for the regulator to keep good order?

III.  Problems of Size The question cannot be answered without attention to both the size of the overall sector and the greatly varying sizes of different nonprofits. The charity sector

14 R

(Gureckis) v Secretary of State for the Home Department [2017] EWHC 3298 (Admin).

Charity Law and Policy: Looking Forward  307 presents challenges for the regulatory state, as it comprises a large part of the economy throughout the common law world. It is clear that regulatory oversight is needed. Moreover, the size of the registered charitable sector itself is only a fraction of the larger nonprofit sector. There are approximately 200,000 registered charities in the UK.15 The size of the nonprofit sector as a whole is at least twice this number, however. In 2012, the National Audit Office assessed the nonprofit sector and its regulation. It noted that the income of the sector as a whole was approximately £113 billion.16 Registered charities had less than half of this income (£55.4 billion), and unregistered charities had £57.7 billion.17 Of these unregistered charities, a large number – more than 100,000 in 2012 – were very small charities, with income of less than £5,000 annually, which are excepted from registration. The distribution between registered charities and unregistered nonprofit organisations is estimated to be similar in Canada, with 86,000 registered charities and 80–100,000 unregistered nonprofit organisations.18 An even larger split exists between unregistered and registered nonprofit organisations in Australia – in 2014, approximately one in 10 nonprofit organisations was registered as a charity.19 Most of the income of the non-registered charities in the UK was concentrated in exempted charities, which are not required to register with the Charity Commission because they are regulated by another entity. These include academies and other school trusts, higher education institutions, museums and other fine arts, the Royal Botanic Gardens at Kew, and a majority of nonprofit housing associations.20 Oonagh Breen in Chapter 8 discussed how a similar issue with multiple potential regulators has created problems for the new charity regulator in Ireland. The lack of regulatory ‘space’ creates issues for emerging regulators, but equally exposure to multiple regulators may well dilute compliance for overstretched nonprofit organisations unable to cope with the regulatory burden. The large variation in size between organisations in the charitable sector also presents regulatory challenges. The same concentration in the wealth of the sector into a few organisations seen in the unregistered sector in the UK is also seen in the registered charity sector: 1.3 per cent of registered charities accounted for 72 per cent of total income in 2016.21 The work of economists such as Kate Pickett, 15 nfpSynergy, ‘Facts and Figures: UK Charity Sector 2018’ (nfpSynergy, 2018). 16 National Audit Office, ‘Regulating Charities: A Landscape Review’ (National Audit Office, July 2012). Estimates of the income of the charitable sector vary widely. The Charity Commission estimated that it was £73.1 billion in 2016; nfpSynergy estimated £48 billion in 2018; NCVO estimated £45.5 billion in 2014/15. 17 Ibid. 18 M Blumberg, ‘Key Statistics on Canada’s Charity and Non-Profit Sector’ (GlobalPhilanthropy.ca, May 2018). 19 M McGregor-Lowndes, ‘The Not for Profit Sector in Australia: Fact Sheet’ ACPNS Current Issues Information Sheet 2014/4 (ACPNS, 2014). 20 National Audit Office, ‘Regulating Charities’ (2012) (n 16). 21 R Keen and L Audickas, ‘Charities and the Voluntary Sector: Statistics’, House of Commons Library Briefing Papers SN05428 (16 August 2017).

308  Jennifer Sigafoos and John Picton Richard Wilkinson and Thomas Piketty has raised awareness of the issue of the injustices of wealth inequality among individuals, but the inequality in wealth distribution in nonprofits is equally, if not more, severe and is worsening. The largest charities have increased their share of the sector’s income over time – charities with annual incomes in excess of £10 million annually controlled 43 per cent of the sector’s income in 1999 and 57 per cent in 2011.22 What is more, large charities are likely to be very different from small charities in terms of the makeup of their funding. In the UK, large charities are more likely than small charities to be reliant on government for the majority of their income.23 Small charities are more likely to rely on individual donations as their main source of funding. In Canada, government-affiliated nonprofit organisations, such as hospitals and universities, are more likely to rely on government funding than community-based nonprofit organisations.24 Large charities are thus more likely to be exposed to the pressures of state funding on mission drift and the best interests of their beneficiaries. All of this means that it is difficult to speak of the charitable sector as a whole or the nonprofit sector as a whole and say much of anything at all beyond a very general statement about what should be motivating these entities’ actions: a charitable purpose and public benefit. This presents challenges when designing effective regulation for the sector. Considering the charitable sector in the UK, the sector with which we are the most familiar, a chasm exists between the regulatory environment appropriate for the overwhelming majority of charities with no paid staff and that appropriate for the approximately one per cent of charities that control nearly three-quarters of the income of the sector. Perhaps we should be considering this chasm from the grassroots side of the divide. In previous empirical work,25 we have encountered the view from a number of charity lawyers and umbrella bodies that large charities are better, more professionally, run. The implication is that there is less to worry about from larger charities. It must be the case, however, that larger charities present larger risks. Large charities will have larger budgets and more beneficiaries depending on the efficient administration of those charitable assets for the designated charitable purpose. A failure on the part of the charity will leave those beneficiaries going without. In situations where charities are engaged in the provision of government services, the failure of a charity to deliver on a contract can mean disruption or delay for people who need vital services. This can be seen in the message from the Chief Executive of the Charity Commission, in its 2018–19 annual report: ‘Charities are increasingly vital to the delivery of services to the public and to communities, and,

22 National Audit Office (2012) (n 16). 23 Ibid. 24 Imagine Canada, ‘Non-profit sector continues to grow’ (Imagine Canada, 5 March 2019). 25 D Morris, A Morris and J Sigafoos, The Impact of the Equality Act 2010 on Charities (Charity Law and Policy Unit, University of Liverpool, 2013).

Charity Law and Policy: Looking Forward  309 by extension those services are increasingly dependent on the effective regulation of charities’.26 Larger charities also present larger risks to public trust and confidence. First of all, the public is more likely to have heard of large charities and to have an opinion of what they ought to do. When people are asked to think of a word associated with charity, they are most likely to name large charities, such as Oxfam, Cancer Research UK, or the British Heart Foundation, rather than local charities.27 More members of the general public will feel a personal stake in the organisation, as more members of the public are likely to have donated or used a service, or to know others who have used a service from that organisation. If a mega charity errs, it is news. We see the discussion of it in the tabloid press; perhaps politicians will try to score political points by raising the story again and again. A risk-based regulator, such as the Charity Commission, would do well to focus its regulation on large entities. Yet the regulatory system of the Charity Commission is not always capable of reaching seeming misfeasance by trustees. In 2019, the Charity Commission issued its decision on its investigation into the Garden Bridge charity, which spent £50 million of taxpayer money and failed to deliver anything of public benefit. It concluded that there had been no failures of governance or mismanagement and that trustees would not face penalties. The Commission tried to distance the ‘failure of charity’ that took place with the Garden Bridge from the risk to other charities delivering public services, noting that the trustees of the Garden Bridge had little independence from the government funders who had designed the project and contrasting this with ‘the usual flexibility and discretion that allows trustees of charities with broader charitable purposes contracting with national or local government to continually assess whether doing so is the best way to deliver on those purposes for the public benefit’.28 It is debatable, though, to what extent trustees of other large charities engaged in government contracts really do have flexibility and discretion in an era of austerity. To surrender government contracts would likely mean cuts to staff, as well as a reduction in the services that could be offered to beneficiaries. One charity that has recently exercised such flexibility is Scope, which has divested itself of its social care services in favour of refocusing on what it perceives as its core mission of advocacy for an equal society for disabled people. This came at a loss of two-thirds of its staff and 40 per cent of its annual income.29

26 Charity Commission, ‘Charity Commission Annual Report 2018–2019’ (Charity Commission, 2019) 8. 27 Populus, ‘Trust in Charities, 2018: How the public views charities, what this means for the sector, and how trust can be increased’ (Charity Commission, July 2018) 4. 28 Charity Commission, ‘The Garden Bridge project: Charity Commission concluding report’ (­Charity Commission, April 2019) 3.1. 29 M Atkinson, ‘How we’re building a greater scope for greater impact’ (NPC, 20 July 2017) www.thinknpc.org/resource-hub/how-were-building-a-greater-scope-for-greater-impact/.

310  Jennifer Sigafoos and John Picton When considering the future lessons to be learned from the Garden Bridge, the Commission concluded that policymakers should ‘think very carefully’ before setting up charities created to deliver major public projects. It stated: ‘[w]e consider it unlikely that the public would expect risks that are inherent in a major public infrastructure project to be outsourced to such a charity’.30 There are indications in the report that the Commission will itself in the future be more careful about allowing such an entity to be registered, looking beyond the assessment of charitable purposes to determine if it is appropriate to pursue a particular project in terms of the risk to the sector. If this is indeed the case, it is welcome. Nevertheless, in framing the lessons learned as being for those outside the Commission looking to set up charities, the Commission is shifting responsibility that should rest with the regulator. Where, as seems to have been the case with the Garden Bridge, an arm of the state is trying to shift or outsource its risk onto the charity sector, then a robust regulator must be able to push back. If £50 million in public funds could be wasted without trustee mismanagement, then the boundaries of trustee action are set at too broad a level. Perhaps the smaller, grassroots organisations are truer to the original ideas of charity. Matthew Harding argues in Chapter 2 that the charitable sector, as a site for voluntarism and altruism in the production of plural goods, merits independence from the state and is bound by various types of accountability to the state. This argument seems stronger when the discussion is framed around smaller organisations, with a clearer link to voluntarism and a closer tie to communities. Research by the Lloyds Bank Foundation has showed that smaller charities are different – they are more distinctive and have features orientated to local needs.31 We have already seen that larger organisations are more likely to receive government funding and to be providing government services via contracts. It does not seem as suitable to argue for greater independence in those situations, and indeed the contracts themselves may bind the charity in ways far more stringent than the regulator. Smaller charities, reliant on the good will of their donors and embedded in their communities, will have checks on their actions from their constituents.

IV.  Hope for the Future? Research by Populus in July 2018, commissioned by the Charity Commission, has indicated that in addition to transparency, public trust in charities is grounded in authenticity and demonstrating that they live their values.32 Lower levels of 30 Charity Commission, ‘The Garden Bridge project’ (2019) (n 28) 3.1. 31 LSE Social Business Hub, ‘Giving big: when it comes to charities, does size matter?’ (LSE Social Business Hub Blog, 11 December 2018) https://blogs.lse.ac.uk/socialbusinesshub/2018/12/11/ giving-big-when-it-comes-to-charities-does-size-matter/. 32 Populus, ‘Trust in Charities, 2018: How the public views charities, what this means for the sector, and how trust can be increased’ (Charity Commission, July 2018).

Charity Law and Policy: Looking Forward  311 trust had the effect of reducing willingness to volunteer money or time to charities. In response, the Commission made it clear that this was beyond the remit of the Commission and was up to charities themselves. Nevertheless, the picture for charities and public trust is not as dim as it is frequently made out to be. Public trust in the charitable sector has plateaued after a fall, but the sector has moved up in the public’s trust relative to other sectors, perhaps reflecting a general loss of trust in society’s institutions. This is an important point. In an era when we frequently despair at the news awaiting us, we need the charitable sector more than ever to improve social cohesion. The potential for the nonprofit sector and civil society to focus and mobilise the public is strong. Indeed, we see from Mark Sidel’s Chapter 3 that concerns over the threat posed by overseas civil society have led to increased state control of their activities in China. The mobilising spirit of nonprofits as a threat to authoritarian state control is an extreme case, but the potential role of the sector is a powerful one in all societies. Although we have discussed the potential for big charities to propose bigger risks, we also need the sector to be entrepreneurial and to tackle big challenges that are beyond the reach of a state. An obvious case is global climate change, a worldwide threat that is both beyond the reach of an individual state’s control and seemingly beyond the reach of current political will. For situations such as this, it is appropriate for the regulator to give nonprofits a long leash. The risk is merited and with big risk may well come a big reward. On the other hand, it is not appropriate for the state to try to shift risks that it should appropriately be carrying itself. We see this when unachievable contracts are tendered out to nonprofits to deliver core social services, placing nonprofits under state control and compromising their independence, while still shielding the state entity in the (sometimes inevitable) event that services cannot be delivered. Another example is a project such as the Garden Bridge, where the state shifted risk, but not the flexibility or the independence to mitigate that risk or to make other decisions. In these instances, the regulator should act robustly to protect the sector from the potential reputational damage. We need a global regulatory framework that is suitable for enabling charities to tackle big challenges – that allows charities to be innovative; to be risky when the potential rewards merit it. But it should not allow charities to be exploited. Research in nonprofit law and policy is an exciting area that has opened up beyond the precedents. The contributions to this volume illustrate that the modern scholarship in the field engages with law, policy, philosophy and other disciplines. As nonprofits occupy such a prominent place in society in much of the world, research into the fault-lines for charity law allows the researcher to engage with society’s big questions. It has been our privilege to curate one such collection of outstanding efforts to understand what is at stake in today’s debates in charity law.

312

INDEX accountability  14, 35–6 constitutive accountability  2, 22, 25, 26, 27 charitable purposes  22, 23, 24, 25 public benefit  23, 24, 25, 26, 27 governance accountability  3, 22, 31–5 voluntarism, and  31, 32, 33, 34, 35 stakeholder accountability  2–3, 22, 27–8, 29–30 government funding  28–9 ‘adapted cy-près’  91–2, 93, 94, 96, 98–100, 101 ‘Affordable Rent’ homes  286 altruism  2, 17–19, 20, 21, 55, 70 social utility  69, 70, 71, 72, 78 see also foundations Andreoni, J  57, 58, 61 Attlee, C  20, 21 authoritarian states  37 see also China Bac, M  66 Baird, D  85, 86 bankruptcy law creditor interests as paramount  85–6 pluralistic model  86–7 see also communitarianism; insolvent charities Barclay, K  180, 201 Barnard, C  123 Barnes Foundation  64–5 Barr, W  83 Batmanghelidjh, C  304 ‘Bedroom Tax’  289 Bekkers, R  223 beneficiary discrimination  103, 104, 106 Berle, A  86 Bevan, N  94–5 Beveridge, W  30, 69, 70, 71 bitcoin see digital currencies Bjerg, O  274 Briggs J  114, 115 Brownsword, R  264 Buraschi, A  60 Burger, Chief Justice  133, 134, 135, 136

Burt, E  216 Cain, J  63 Cameron, D   304 Carr, H  297 charitable activities  129, 130, 131, 139 activities constituting non-charitable activities  147 activities determining purposes  142–3 activities qualifying as charitable activities  145–6, 147, 151 Bob Jones University v United States  132–8 public policy  133, 134, 135, 136, 137, 138, 147, 150, 151 racially discriminatory admissions policies  132, 133, 134, 135, 137 religious beliefs  138 ‘dual character activities’  147 primacy of purposes over activities  140–41 public benefit, and  147–50 regulation of  131, 132, 152 indirect regulation  140 restricting  152 statutory interventions  152–3 see also charitable purposes charitable incorporated organisations (CIOs)  175, 176 charitable purposes  6, 130, 139, 141 abstractions, as  143–4 categories of  139 constitutive accountability  22, 23, 24, 25 objectionable purposes  141 see also charitable activities Charities Aid Foundation (CAF) Bank  288 Charity Commission regulation role of  213, 215, 222, 223 see also regulation Cheung Kam Hung  49 China academic exchange and cooperation  43, 46, 47 ‘Belt and Road’ internationalisation initiative  45 fundraising by nonprofits  45, 50

314  Index new typology of overseas nongovernmental organisations  47, 49 groups moving on  49 ‘hibernators’  48 human rights groups  49 increased legalisation, impact of  47 regionalising China operations  48 trade associations  47 ‘workarounders’  48 Overseas NGO Law (2016)  40, 42, 43 enforcement of the framework  49 framework for the regulation of overseas nonprofits  43, 44, 45 implementation of  50 overseas nonprofit organisations  3, 38 history of  38–40 Ministry of Public Security, role of  42–3, 44, 45, 49, 51 ‘moulding agenda’  44, 45 security ministries  40 strengthening of the role of the state in society  40–41, 51 voluntary sector  37–8 wider definition of ‘overseas’ organisations  42 CIOs  175, 176 cisgender women case study on counselling services for cisgender women  109–10 ‘charities exception’  112–18 positive action  121–2 protection from discrimination based on transgender status  110–12 single-sex services  118–21, 128 Civil Society Strategy  234, 255 Collingridge, D  264 ‘color revolutions’  41 commodity consumption, linking charitable giving and  60 communitarianism  4–5 non-profit corporations  88–90 profit-making companies  85, 87–8 see also ‘adapted cy-près’ Compact  256 Connolly, C  218 constitutive accountability  2, 22, 25, 26, 27 charitable purposes  22, 23, 24, 25 public benefit  23, 24, 25, 26, 27 ‘contract culture’  232 see also payment by results contracts Cook, O  208 Cordery, C  211, 216

Cornelli, F   60 Corry, O  211–12 ‘creaming and parking’  241, 244, 245 Cullity, M  130 cy-près   4, 5, 82, 83, 84, 98 see also ‘adapted cy-près’ Decent Homes standard  289 Deguchi, M   216 Denning, Lord  61 Desai, A  219 digital currencies  10–11, 257, 258 adoption of  276, 277 legal challenges  266–7, 277 effectiveness  269–71, 276 Gift Aid  273–5, 276 incidental impact  275, 276, 277 proportionality  271–3, 276 regulatory appetite  269, 276 regulatory competence and consistency  267–9, 276 opportunities for charities  259, 277 fundraising  259–61 transferring of funds  261–2 pseudonymity  261 regulation considerations  263–6, 277 speed  261 transparency  261 discrimination  5–6, 103 beneficiary discrimination  103, 104, 106 case study on counselling services for cisgender women  109–10 ‘charities exception’  112–18 positive action  121–2 protection from discrimination based on transgender status  110–12 single-sex services  118–21, 128 exception for charitable gifts  105 hierarchy of rights  108–9 justication for  122, 127, 128 principles of equality law  123–4 public benefit  122–3 substantive equality  124–7 positive discrimination  104, 106 public benefit, and  148 sources of sanctions for discriminatory charitable purposes and activities  107 study on the implications of the Equality Act for charities  107–8 diversity   14, 15, 16, 20, 21, 22 Dodd, M  86

Index  315 donative economics  54–5, 56–9 altruism  55 egoism  55 mix of altruistic and egoistic motivation  64–5 see also altruism; egoism ‘dual character activities’  147 Eason, J  73, 74, 75 egoism  4, 55, 59–60, 61, 64 desire for legacy  59, 62–4, 65, 78 linking charitable giving and commodity consumption  60 social acclaim, and  61–2 wastefulness  71, 72 see also foundations Eisenberg, M  57 Eldon, Lord  74 Elias J  114 Etherington, S  215 Etzioni, A  88–9 Evershed J  72 Farwell LJ  63, 65, 67 Feldman, D  125 Financial Action Task Force (FATF)  267, 268 Fletcher, N  217–18, 219–20 foundations  53, 54 plan protection  65–8, 73 duty owed by the public  66 low-utility giving  69, 70 obligation-generating deal  65, 66 policy tool to encourage donation  66–8, 78 wastefulness  71, 72, 73, 78 reform of ‘funnel method’  73–5 time-limited plan protection  75–7, 78, 79 see also altruism; donative economics; egoism Fredman, S  124, 127 Fundraising Regulator for England and Wales  215 Fundraising Standards Board (FRSB)   215 ‘funnel method’  73–5 Garden Bridge  309, 310, 311 Gardner, J  26 Gift Aid digital currencies, and  273–5, 276 GiveWell  71

Goff J  60, 61 Gonthier, Justice  145, 146 governance accountability  3, 22, 31–5 voluntarism, and  31, 32, 33, 34, 35 government funding stakeholder accountability  28–9 Grabham, E  126 Gross, K  87, 88, 90 Guardian  305 Harding, M  106, 112 HCA  292 Hepple, B  123 Hodgson, Lord  83 Home Office Immigration, Compliance, Enforcement (ICE) teams  284–5 homelessness  290 see also social housing Homes and Community Agency (HCA)  292 Hospital of St Cross and Almshouse of Noble Poverty  105 human rights groups China  49 Hunter, E  62–3 Hyndman, N  210, 216, 218, 222 Iacobucci, Justice  146 independence  13, 14, 17, 19–20, 35 altruism  2, 17–19, 20, 21 diversity  14, 15, 16, 20, 21, 22 voluntarism  2, 16, 20, 21, 22 see also accountability independent schools  26, 27 debates on allowing schools the full range of tax reliefs  205–6 for and against the abolition of independent schools  202–3 removal of charitable status of  203–5 Scotland see Scotland information asymmetry  210 insolvent charities  98, 100 ‘adapted cy-près’  91–2, 93, 94, 96, 98–100, 101 charitable gifts, use of  92–3 cy-près  82, 83, 84, 98 Liverpool and District Hospital for Diseases of the Heart  94–6 rescue and communitarian approach  82, 83, 84, 100–101 Wedgewood Museum Trust Ltd  96–8 see also communitarianism

316  Index Ireland agencies’ oversight roles in the regulation of charities  158, 164–5 Attorney General  161, 162, 163 Commissioners for Charitable Donations and Bequests (CCDB)  162 Companies Registration Office (CRO)  159–61 Public Accounts Committee (PAC)  163–4 Revenue Commissioners  158–9 Charities Regulatory Authority (CRA)  7, 177 charity passport scheme  174–5 correct classification of charitable entities  168–9 establishment of  155–6, 165 register of charities  165–6 regulatory reporting requirements  170–73 sectoral awareness of the need to register  166–8 separation of tax and charity status  169–70 establishment of the new regulatory framework  176–7 Office of the Director of Corporate Enforcement (ODCE)  160–61 Jackson, T  85, 86 Johnson, A  66 Jones, G  92 Kids Company  304, 305, 306 Kovrig, M  49 Landry, C   60 LDHDH  94–6 Lee, S  208 legacy, desire for egoism, and  59, 62–4, 65, 78 Leonard and Beryl Buck Foundation  53–4 Liverpool and District Hospital for Diseases of the Heart (LDHDH)  94–6 Lloyds Bank Foundation  310 Lowe, T  240 MacFarquhar, L  70, 71 Macnaghten, Lord  14–15 Mandeville, B  17 Martin, J  98 Martin, M  20

McCann, C  119 McColgan, A  126 McCrudden, C  124 McDonnell, P  210, 216, 222 McGranahan, L  62 McKenzie, District Judge  297–8 Meng Wanzhou  48 mentally vulnerable individuals social housing  280 access to legal advice  296–8 campaigning and advocacy functions of charities  298–9 duty owed to vulnerable homeless people  295–6 floating support and supported housing  295 relationship between mental health and housing tenure  293–4 Merlin Standard  244–5 Mill, JS  16, 17, 18, 21, 30, 75, 76, 77 Mind  293 Morgan, G  216, 217–18, 219–20 Morgan J  33 Morris, D  28, 29, 216 Munoz-Darde, V  20 Nash, T  71, 72 National Audit Office (NAO)  236, 240, 243 National Council for Voluntary Organisations (NCVO)  232, 242 Neuberger, Lord  296 ‘new public management’  27–8, 30 O’Cinneide, C  127 O’Neill, M  211 Organisation for Economic Co-operation and Development (OECD)  179 Ostrower, F  219 Owen, D  303 Parachin, A  122 payment by results (PbR) contracts  9, 231, 232–3, 234, 236, 256 alleviating measures  243 Social Impact Bonds  245–50 use of sub-contractors  243–5 challenges for charities  236–7 financial cost of PbR contracts  238–40 impact on beneficiaries  240–42 measurement and linkage  242–3 trustees’ duties and risk  237–8

Index  317 delivery terms  235–6 future prospects  253–6 government support for  250 Social Investment Tax Relief  250–51 trustees’ duties and social investments  251–3 innovative nature of  236 model of  234–5 problems with  235 Pearce, R  83 Pearson, E  67, 69 perpetuity  4 see also foundations Peterborough SIB  247, 248, 249 Petri, R  61 Phillips, S  213 plan protection  65–8, 73 duty owed by the public  66 ‘funnel method’  73–5 low-utility giving  69, 70 obligation-generating deal  65, 66 policy tool to encourage donation  66–8, 78 time-limited plan protection  75–7, 78, 79 wastefulness  71, 72, 73, 78 positive discrimination   104, 106 Powell, Justice  24–5 pseudonymity digital currencies  261 public benefit charitable activities, and  147–50 constitutive accountability  23, 24, 25, 26, 27 public interest theory  207, 208, 209–11, 230 Purle QC  97 regulation  155, 207 charities’ views on charity regulation  220 costs and benefits of regulation  215–17 effectiveness of regulation  217–18 form regulation should take  218–20 Charity Commission role of  213, 215 establishment of charity regulators  156–7 Fundraising Regulator for England and Wales  215 Fundraising Standards Board  215 global regulatory framework, need for  311 public attitudes to charity regulation  220–21, 222, 229, 230 effectiveness of regulation  223–5 form regulation should take  225–7 relationship between regulation, trust and charitable giving  222, 223

role of Charity Commission  222, 223 self-regulation / state regulation  228–9 requirements and benefits of  212–13 reviews of charity regulatory frameworks  173–4 self-regulation  213–14, 215 theories on regulation  209, 211–12 public interest theory  207, 208, 209–11, 230 trust and confidence  207, 208, 211 see also Ireland regulatory state  303 nonprofit controversy, and  303–6 size of the charity sector  306–7 size of the non-profits  307, 308, 309, 310 Romilly, J  65 Rowles, G  62–3 Russell LJ  24, 140 Sales J  115, 116, 118, 126 Sargeant, A  208 Schermer, B  89 Schweizer, H  65 SCIS  182 Scotland arguments for and against the removal of charitable status of independent schools  194–6, 199–200 education system not charities system, schools as part of  198–9 ‘sink or swim’ approach  197–8 technicalities of exclusion  196 charitable status of independent schools  185–6 advantages of charitable status  187–9 arguments for and against the removal of charitable status  194–200 charity test  186, 187, 189–91 fees as restrictive conditions  191–4 public benefit requirement  186, 187, 190, 191 education system  179, 181 comprehensive schooling  181 ‘empowering schools’  181 endowment and ‘proprietary’ schools  182 independent schools  7–8, 179, 182 arguments for and against allowing schools the full range of tax reliefs  200–202 arguments for and against the abolition of  183–5

318  Index arguments for and against the removal of charitable status of  194–200 charitable status of  185–94 fees charged  179–80, 182–3 funding  179, 182 non-domestic rates relief  180, 188 numbers of  182 regulation of  182 Scottish Council of Independent Schools (SCIS)  182 Sharpe, A  110 Shelter Commission  280, 286, 287, 288, 292, 298, 299 SIBs  9, 245–50 Simonds J  74 Singer, P  70, 71 SITR  250–51 Slade J  95, 96 Sloan, M  211 Smith, S  213 social acclaim egoism, and  61–2 social housing  11, 279–80 alternatives to ‘Affordable Rent’ homes  286 benefits of charities involved in social housing  283–4 challenges for charities involved in social housing  284–5 Charities Aid Foundation Bank  288 costs of social housing development  287–8 decline of social housing sector  285–6 housing benefit payments  290–91 mentally vulnerable individuals  280 access to legal advice  296–8 campaigning and advocacy functions of charities  298–9 duty owed to vulnerable homeless people  295–6 floating support and supported housing  295 relationship between mental health and housing tenure  293–4 quality and suitability of housing stock  288–90 regulatory and legal framework  282, 292–3 repossession through eviction  291–2

role of charities  281, 282–3 specialist provision  283 stigma  293 Social Impact Bonds (SIBs)  9, 245–50 Social Investment Tax Relief (SITR)  250–51 social utility altruism  69, 70, 71, 72, 78 St Mungo’s  284–5, 305, 306 stakeholder accountability  2–3, 22, 27–8, 29–30 government funding  28–9 Stone, M  219 Stowell, T  58 Taylor, J  216 Third Force News   194 time-limited plan protection  75–7, 78, 79 transgender people see discrimination trust and confidence  310–11 regulation  207, 208, 211 Vaisey J  142 Verbruggen, S   219 Vickers, L  124–5, 126, 127 Vinelott J  63 voluntarism  2, 16, 20, 21, 22 governance accountability, and  31, 32, 33, 34, 35 Warren, E  87 Watkin, T  105 Wedgewood Museum Trust Ltd  96–8 Week J  63 Weir, B  67–8 Wells, C  177 Wesley, J  56–7 Wilberforce, Lord  105 Williams, O  167–8 Wilson, R  240 Witherington, B  57 Wollstonecraft, M   20 Xi Jinping  40 Yermack, D   274 Yetman, R  219 Young, I   124