Regulating Charities

The Inside Story

Myles McGregor-Lowndes, Bob Wyatt, Myles McGregor-Lowndes, Bob Wyatt

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317190585
• Edition: 1
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

In this volume charity commissioners and leading charity policy reformers from across the world reflect on the aims and objectives of charity regulation and what it has achieved. Regulating Charities represents an insider's review of the last quarter century of charity law policy and an insight for its future development.

Charity Commissioners and nonprofit regulatory agency heads chart the nature of charity law reforms that they have implemented, with a 'warts and all' analysis. They are joined by influential sector reformers who assess the outcomes of their policy agitation. All reflect on the current state of charities in a fiscally restrained environment, often with conservative governments, and offer their views on productive regulatory paths available for the future.

This topical collection brings together major charity regulation actors, and will be of great interest to anyone concerned with contemporary third sector policy-making, public administration and civil society.

1 Introduction

Myles McGregor-Lowndes and Bob Wyatt

English charity law and its regulation have undergone more change in the last 25 years than during the previous century. The Charity Commission for England and Wales (CCEW), regarded as the mother of charity regulators, has created an accessible public register of charity information, embraced digital technologies, implemented a statutory definition of charity, rattled the cage of religious and educational institutions by insisting that they prove their public benefit, tackled regulating political purposes, and responded to a collapse in public trust in charities precipitated by tax and fundraising abuses. The Commission has also modernised its work practices and governance, and together with the sector has faced challenges to their independence from government. Business-charity hybrid organisations have also arisen to complicate charity regulation.

Significant change was also afoot in the English Antipodes, New Zealand, and Australia. They adopted English charity law from colonisation, but not a central regulator such as the Charity Commission. Recently, both countries have replaced low-key, self-regulatory regimes with Commission-style agencies,¹ enacted a statutory definition of charity, and adopted full financial and activity reporting on modern digital public registries. An interesting feature is that policy developments in these countries appear not to have been a staged incremental process, a political reaction to a public scandal, or party political or ideologically driven reform. Instead, they have resulted from laborious, decade-long campaigns by the sector, although perhaps after some initial suspicion. More changes have ensued in both jurisdictions, with incoming conservative governments intent on disestablishing the newly established commissions—a plan that succeeded in New Zealand, where the Charities Commission ceased in 2012. The dearth of charity case precedents for decades in both countries was also broken with a series of significant superior courts cases, including decisions that departed from the restrictive English precedent about political purposes.²

Canada and the United States have had relatively stable legislative regimes and formal administrative infrastructure for charities over the last quarter of a century, but change has occurred and more is afoot. Long ago, they each adopted English charity law in varying degrees, with charity regulation constitutionally in the hands of their states and provinces. National charity regulation was located in their national tax agencies. Both countries have faced serious challenges to their administrative independence from political masters, creating internal and external controversies for regulators. The Canada Revenue Agency (CRA) has moved closer to the charitable sector in conversing about legislative and administrative reforms over the period. In Canada, federal governments of all persuasions have attempted to constrain charities that seek to be players in the political sphere, but none has been as divisive as the recent Harper conservative government. It specifically funded CRA to audit charities with a public policy bent, which has been interpreted by some as payback for environmental charities objecting to government-encouraged oil pipeline development. However, CRA has also had to face abuse of the tax system on an industrial scale by promoters of tax avoidance schemes for charitable gift deductions. CRA has been hampered with limited effective regulatory tools, legacy issues with a partially digitised public charity register, and little assistance from provincial charity regulators.

The US Internal Revenue Service (IRS), as a regulator of charities with slim resources, has always faced a challenging environment. The United States has a significant population of diverse, hybridising, and sector-hopping organisations that are responsible for the delivery of critical public goods of education and health, as well as complex legislative provisions, uncompromising professional advisers, and fundraisers with a high-risk appetite. Political parties from both sides have sought to influence administration of charities involved in political activities and fundraising. Recently, there have been murmurs about the IRS having lost the confidence of both sides of Congress to regulate charities. The core worth of charity oversight is being questioned, with excessive government interference and serious proposals to roll back generous gift deductions. Unlike the Canadian provinces, the US states are seeking to move into this growing regulatory vacuum with innovative plans to provide a more effective regulatory presence within constrained budgets.

The working lives of this book’s editors have also coincided with this era of charity law and regulation. Both are active sector participants as well as periodically being co-opted into charity regulatory agencies or government and occasionally have been involved with those in foreign jurisdictions. We have appreciated becoming acquainted with charity regulators in such capacities, often continuing the relationship through sector forums long after their terms have concluded. An idea was incubated at an international forum in late 2014 to compile the reflections of charity regulators, to capture an insider’s review of charity regulation and policy during the last quarter of the century, and to draw on insights for its future development. Those at the forum were enthusiastic about the project, and that enthusiasm carried into their first drafts, which were nearly three times the specified word limit. To balance their contributions, invitations were extended to influential sector reformers in each jurisdiction to interject their reflections about charity law and regulation. These are people with exceptional insights, gleaned from being on the front line of regulatory action and reform processes over the whole quarter century.

The orthodox plan for a comparative law and policy project is to prepare an issues template and have each jurisdictional commentator describe the functional legal or policy problem and then the jurisdiction’s response.³ This facilitates comparison, analysis, and synthesis of issues in the editors’ final chapter, but such a functional approach may neglect the wider cultural context.⁴ Further, the chosen template may reflect the editors’ immediate experience, which can taint, constrain, and even pre-determine the contributions. We decided to take a slightly different methodological tack, releasing contributors from a given template and allowing them to concentrate instead on their reflections or narrative—the inside story.

Those who are part of the charitable sector are good storytellers—a characteristic which may emanate from the sector’s religious roots, or from a grounding in social work, or successful fundraising where the story is an essential art form. As leaders tell their stories, they build narrative accounts for their organisations, helping them understand what they think organises their experiences and controls and predicts events. Charity law itself can be viewed as a story. It is found in the tales told to professional advisers by charity officials and recounted by lawyers to regulators and courts. Judges tell the parties’ stories in case decisions, and politicians respond to stories of injustice amplified by the press; and then there is the story embodied in legislation.⁵

We encouraged regulators to provide a narrative expressed in their lived and told stories. How do they make sense of their regulatory agency, its actions, and its relationships with others? Sense-making has been used to provide insights into factors that surface as organisations address either uncertain or ambiguous situations.⁶ It occurs as a social activity in that plausible stories are preserved, retained, or shared, becoming a reality that emerges from efforts to create order and make sense, retrospectively, of what has occurred. Often chronological time is replaced with kairotic time, time punctuated by meaningful events or dramas, in the retelling of sagas.⁷ Readers should not be surprised if apparently conflicting accounts appear in different contributors’ narratives, or if they depart from authorised histories or accepted views.

Initially, contributors were invited to share headline issues that they intended to cover; these were then collated and shared with all. Draft chapters were prepared and circulated before an in-person meeting of nearly all contributors. The Muttart Foundation graciously facilitated the meeting and allowed a little over a day’s review and comment by contributors, who were joined by some long-time sector commentators. Contributors then set about revising their drafts and editing to meet the word limits.

We acknowledge that the selection of jurisdictions (England and Wales, the United States of America, Canada, Australia, and New Zealand) is Anglo-Saxon, common law centric, and incomplete. There are no civil law regulators, which might have resulted in a richer analysis and the new regulators of Scotland and Ireland are missing. Our publisher has page limits and bringing together the reflections of a selection of common law charity regulators is enough of a logistical challenge. We hope others may build on our work in the future. Having jurisdictions with a common heritage and shared experience does have advantages for an initial foray into this topic.

All the chosen jurisdictions have been swept during the last quarter century by the megatrends of new digital technologies, innovative social media, globalisation of trade, and capital and social discourse, as well as experiencing the challenges of financial crises, austerity budgeting, and terrorism. At the beginning of our period, Prime Minister Thatcher’s application of private-sector management ideas to the public sector and policy processes led to citizens being viewed as customers and market force accountabilities affected not only the shape of English charity regulation but also quickly spread to Australia, New Zealand, and North America. The application of what soon became known as New Public Management (NPM) affected all charity regulators. It has also affected charities that are recipients of government funding in providing community services and other public goods.

Two developments have been apparent in all jurisdictions under consideration. Both are contributions originating from the academy, but have practical significance for charities and those who oversee them. The first is the new knowledge created by the “invention of the nonprofit sector” and its investigation by scholars.⁸ Although far from complete in its coverage, it provides new theoretical and empirical insights about charities and their behaviours, which were previously unavailable. The second is the emergence of responsive regulation in the emerging field of regulatory studies.⁹ Regulators are now provided with a range of practical tools, derived from sophisticated theories, which have broken free from merely invoking the free market, or classic command and control government strategies. Regulators now use the regulatory pyramid, risk compliance continuums, stick-and-carrot incentives, and co-option of third parties to do some regulatory heavy lifting—all encouraged by times of fiscal restraint.

A short note is warranted on the terms used, as it is usual for editors to settle on uniform meanings. Words such as charity, nonprofit, not-for-profit, third-sector organisation, and nongovernment organisation have technical meanings, but are often used casually and interchangeably even in one jurisdiction. There are also the complexities of translations across jurisdictions to be considered. However, in telling their narratives, the authors have been left to use the language that comes naturally to them so as not to detract from their discourse. This means that readers will need to be vigilant as to different meanings used by authors. We turn now to introducing and locating the contributors in the last quarter century and in their jurisdiction.

England and Wales

The first set of reflections focuses on the Charity Commission for England and Wales over the last 25 years. Two former Charity Commissioners and the head of the umbrella association for charities, who were central actors during this period, wrote these chapters, and their insights are revealing. The origins of the modern Charity Commission may be traced to the Charitable Trusts Act 1853, but our examination begins with the commissioner, Richard Fries, charged with the modernisation of the Charity Commission during the decade of the 1990s. The Woodfield Report was the first major review of English charities law and its regulation since the passing of the Charities Act 1960.¹⁰ Richard was a career civil servant in the British Home Office, and before his appointment as charity commissioner, he was the under secretary responsible for overseeing the implementation of the Woodfield Report. During the 1990s, Richard drove a modernisation agenda for the Charity Commission. He reflects on the journey of nudging the Commission from a quasi-judicial facilitative body to one with supervisory and investigative capacity. This meant a closer engagement with charities, as the Commission experimented with influencing behaviour through education, training, and guidance documents. Early sceptics of this approach were being heard then, and their rhetoric would grow in the coming decades. The establishment of a functioning charity register was a mark of this period made possible by deft manoeuvring to garner resources for an ever hungry information technology programme. The advent of a register open to public scrutiny also required greater clarity of the registration criteria. This process pushed the charitable object boundaries wider, bringing them closer to contemporary public sentiment. This work later informed the agenda for statutory guidance in 2006. By the turn of the century, this definitional work allowed the commencement of a formal review of the register to ensure that the public could have confidence in its accuracy.

Lindsay Driscoll then takes up the English narrative. From 2003 to 2008, Lindsay was a legal commissioner at the Charity Commission. Her background was as a specialist charity lawyer in private practice, and before that, she was with the National Council for Voluntary Organisations (NCVO), where she rose to head the Legal and Governance Department. During this period, she was involved in leading the charity sector’s response to the Charities Bill 1992. While at the Commission, she was at the centre of the introduction of the statutory definition of charity, the creation of the charity tribunal, and other significant reforms contained in the Charities Act 2006. Rarely has the definition of English charity seen such reform activity, but her view is that the reforms mostly confirmed the practices of the Commission developed since the 1990s. She reflects on the controversial guidance on public benefit and revised commission guidelines on political activities that occupied so much of the sector agenda during this period. The Commission was, at the same time, developing its internal governance and regulatory approach, dealing with issues of its own independence as well as protecting the sector’s independence and being confronted with the terrorism agenda. The role of the Commission was again being pushed and pulled between that of police officer and friend of the sector, and the issue of its independence was raised by sector umbrella bodies, public service, politicians, and views of a succession of Charity Commission chairs. Lindsay also offers her insights on the developments after the slashing of Commission’s funding in 2012 and future challenges for the sector and its regulation.

Sir Stuart Etherington concludes this section with his reflections on English charity regulation from a sector perspective. His length of tenure at the charity umbrella association and appointments to reform inquiries by successive governments place him in a unique position to consider charity regulation and the Commission. He was appointed chief executive of NCVO in 1994, having previous experience as a CEO of a major charity. The NCVO is a membership organisation that represents the interests of over 11,000 charities and voluntary bodies. Sir Stuart’s government appointments gave him an added vantage point. These include the Prime Minister’s Delivery Unit, the Cabinet Office Performance and Innovation Unit’s Advisory Board on the Voluntary Sector, HM Treasury’s Cross Cutting Review on the Role of the Voluntary Sector and recently as chair of the Cabinet Office’s Review of self-regulation of fundraising. The theme of Sir Stuart’s reflections is the pressure applied to a rapidly growing and diverse sector which requires public trust and confidence to be able to operate effectively. He points to charities being buffeted by increasing public expectations about the acceptable levels of accountability, transparency, and scrutiny driven by an inquisitive and antagonist popular press magnified by social media. Added to this is the increasing muddying of boundaries between government, business, and charity sectors. Government bodies are morphing into charities, charities are hybridising with business, and a good number inhabit a twilight zone between sectors, thus adding to the public confusion. Sir Stuart couches the role of the regulatory framework as being to “protect and promote charity,” but he concludes that charities have to control their destiny through self-regulation and individual relationships with their supporters. He proceeds to this position after reviewing NCVO’s role in the Charities Act 2006, litigation over public benefit status, charity CEO remuneration, the failure of fundraising self-regulation, and its reconstruction in the face of unprecedented popular press attention. The chapter also includes critical examination of the Commission’s governance and its independence.

United States

Just about everything to do with philanthropy, charity, and nonprofit organisations in the United States is conducted on a grand scale, and it has been thus for a considerable period. Its regulation sometimes amazes those involved, just as much as it does those observing from foreign shores. Marcus Owens spent 25 years with the IRS, including as director of the Exempt Organizations Division from 1990 until 2000. In that capacity, he was the chief decision maker regarding design and implementation of federal tax rulings and enforcement programs for exempt organisations, political organisations, and tax-exempt bonds. He also served as the IRS’s primary liaison with other federal agencies, Congress, and state regulators on issues involving exempt organisations. Since that time, he has been in professional legal practice specialising in federal tax issues relating to tax-exempt organis...