Draft Charities and Trustee Investment (Scotland) Bill
5. Impact of proposed reforms
Draft Regulatory Impact Assessment (RIA 2004/04)
This draft Regulatory Impact Assessment aims to provide information on the options considered in relation to regulation of charities operating in Scotland, and their likely impact on the charitable sector. Under Scottish Cabinet rules, any piece of legislation which will create or extend a regulatory regime must include a consideration of the impact of regulation on the relevant sector. We would welcome your comments on the assumptions made here, in order to revise this RIA and improve its accuracy.
1. Purpose and intended effect of regulation
(i) The objective
In 2000, the Scottish Executive established the Scottish Charity Law Review Commission (the McFadden Commission) to review Scottish charity law and make recommendations for reform. The Commission reported in 2001, making 114 recommendations for change, including the consolidation of existing law, the creation of a statutory charities regulator in Scotland, and increased regulation of fund-raising and other charity activities.
The Scottish Executive is committed to reform the regulatory regime for charities, in order to support the charities sector and to safeguard the public interest in relation to charities. This draft Regulatory Impact Assessment (RIA) accompanies a consultation paper and draft Bill setting out the Executive's proposals for fulfilling this commitment.
This RIA provides background information on the options which were considered prior to the drafting of the Bill, and the probable impact and cost of these options. We would welcome views on the issues considered in this RIA, which will be amended and published in final form when the charities Bill is introduced to the Scottish Parliament.
Devolution: The draft Bill and ensuing regulations will apply to charities and their operations in Scotland only.
(ii) The background
Regulation of Scottish charities is currently governed largely by Part I of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990, but a range of other statutes also apply. Organisations within the charities sector have called for reform and consolidation of the law for some time. Research commissioned by the Scottish Executive to evaluate the 1990 legislation suggested that existing legislation should be repealed and consolidated in a single Act, incorporating a number of improvements to the regulatory regime.
The McFadden Commission also identified a number of problems with the regulation of charities in Scotland. Deficiencies in the regulatory system include gaps in responsibility between different regulators, lack of a public register of Scottish charities, and lack of routine monitoring of charity activity, and may have contributed to recent dips of public trust in charities. The absence of a central point of information to charities on their duties under the law has also been suggested to be a problem for the charities sector.
The regulatory regime for charities proposed in this consultation seeks to address these gaps, and to deliver a system that is fit for purpose and protects the public interest without being overburdensome or more costly than necessary.
(iii) Risk assessment
Summary profile of the Scottish charitable sector (SCVO 2004) 2
- There are 28,869 active or potentially active Scottish charities (Feb 2004).
- The vast majority of charities (92%) operate at a local or sub-regional level.
- The majority, 63% of charities have been set up to provide a service. Alongside this, 42% of charities are active in social welfare and 32% are primarily involved in Arts & Sports.
- The highest concentrations of charities are in the central belt cities of Edinburgh (13%) and Glasgow (11%), although a further 7.7% operate in the Highland council area.
- 41% of charities have their headoffice in a predominantly rural council area.
- At least 67% of charities have an income of under 25,000 a year.
2 Figures in this draft RIA are drawn from SCVO's Report on Scottish Charities 2004 (full report available at www.scotland.gov.uk/viu )
Empirical evidence suggests that the vast majority of Scotland's 20,000+ charities are operating effectively for the public good in local communities. However, a handful of recent cases have shown the impact of loss of public confidence in charities in general.
Scottish charities raise around 240 million a year through donations from the general public, which equates to around 12% of the sector's total annual income. These funds are of particular value to charities as they have fewer restrictions attached than grant or contract funding, and they provide a litmus test of public support for the charity's activities. Without effective regulation of charities, there is a risk to public confidence in the sector as a whole. This could have a dramatic impact on income to the charities sector through public giving. It could have a knock-on effect on other forms of income to the sector, such as corporate giving, or even public sector funding. This would have an inevitable consequence for the vast range of services, activities and employment provided by charities in our communities.
Further loss of public confidence in charities would also be likely to impact on levels of volunteering and community engagement, potentially leading to a decline in the role of the charities sector and a subsequent loss of social capital and cohesion. For all these reasons, the charities sector itself has been a key voice calling for better charity regulation.
2. Options
In deciding to reform the regulation of charities in Scotland, the Executive initially looked at three options.
Option 1: Do nothing
It has been argued that the existing system works effectively. Organisations are recognised by the Inland Revenue as charities if they meet the requirements of tax law. Their accounting and reporting systems, and some elements of their fundraising, are set out in regulations. Complaints are investigated and, where misconduct is found, a range of sanctions can be imposed by the Office of the Scottish Charity Regulator.
However, it would be highly unsatisfactory to do nothing to improve the existing system. All research and opinion on the subject of charity law makes it clear that doing nothing is not an option. The existing system does not adequately promote public confidence in charities, and is opaque and difficult for charities to comply with.
Option 2: Develop a mixed regulatory model
This option would involve two complementary approaches. Government would prepare a single charities Bill to provide a basic framework to safeguard the public interest and to ensure proportionate regulation of charities. The legislation would be bolstered by a robust system of self-regulation to be developed by the charities sector itself.
There are some risks associated with this approach, in that self-regulatory models do not automatically attract public confidence. However, should self-regulation fail to deal with the public's concerns, the regulatory option remains open to government. The self-regulation approach is particularly attractive in relation to fundraising activities, which are not currently regulated by government, and where practice continually develops over time.
This option is considered to be most attractive, and forms the basis of the attached draft Bill and consultation paper.
Option 3: Regulate charity activity in law
The final option considered was to promote public confidence through setting out a regime to regulate charity activity through a charities Bill and associated regulations. This would entail an ongoing process of consultation between the Executive, the charities sector and other stakeholders to ensure that statutory regulation was consistent, proportionate, and in the public interest.
The risks associated with this approach are that regulation could be inflexible and fail to meet changing expectations from the public or practices within the sector. This can be seen in the existing 1992 accounting regulations for charities, which now conflict with good practice in charity accounting and fail to secure the transparency expected of charities by the public.
3. Benefits
Option 1: Do nothing
There are no obvious benefits flowing from option 1, other than, in comparison to other options, the costs-savings to the Executive in continuing with the existing system, and the possible savings to charities in continuing with existing practice. The risks to public confidence in doing nothing far outweigh these benefits.
Option 2: Develop a mixed regulatory model
This option would provide a number of benefits. Through the proposals in the attached Bill, charities will benefit from increased public confidence, leading to a potential improvement in donations and volunteering. They will benefit from a more transparent regulatory system, and from the requirement that regulators should co-operate to reduce the regulatory burden on the charities sector. They will benefit from inclusion in a national, publicly accessible register, which will increase their profile and the public's understanding of their role. They will benefit from an easier process for mergers and re-organisations. They will have access to a wider range of investment powers and to a new constitutional vehicle.
Under the proposed self-regulatory system for charity fundraising, charities and professional fundraising organisations will benefit from a flexible, developing model ensuring good practice grounded in the realities of the fundraising environment. There will be a clear, impartial avenue for complaints about charity practice. Should the self-regulatory option fail to provide the expected benefits, the Executive will reserve the power to regulate charity fundraising directly.
Option 3: Regulate charity activity in law
This option would provide similar benefits to option 2. However, charities would not have access to the benefits of flexible self-regulation of fundraising. Instead, they may benefit further by increased public confidence based on a statutory regulatory system. This possible additional benefit may, however, be counter-balanced by the costs of inflexible regulation as set out above.
Business sectors affected
All existing charities operating in Scotland will be affected by the proposals in the attached consultation paper. Currently non-charitable voluntary organisations may also be affected, since they may gain access to charitable recognition for the first time, under the revised definition of charity.
Professional fundraising organisations will be affected, since the proposals include a requirement for direct-debit fundraising to be licensed by local authorities, and a requirement for professional fundraising organisations to agree contractual terms with the charities they act for. There is also a proposed requirement that professional fundraising organisations and commercial participators should make it clear to potential donors how much of the donation would go to charity.
Issues of equity and fairness
The proposals will introduce a proportionate and consistent regulatory regime for all charities operating in Scotland. Regulatory requirements will be greater for larger charities, and do not aim to increase burdens on smaller organisations.
The proposals also introduce a requirement on the charity regulator to seek to work in partnership with other existing regulators, to reduce the regulatory burden on charities.
4. Costs
(i) Compliance costs
Option 1: Do nothing
There would be no increased compliance costs under this option. However, there may be substantial costs to the charities sector in failing to bolster public confidence, potentially leading to a loss in income and volunteer activity.
Option 2: Develop a mixed regulatory model
There may be some additional compliance costs for charities under this option. Charities will be required for the first time to lodge annual accounts and other information with the charities regulator. They will be required to be able to demonstrate that they are acting within their constitutional objectives for the public benefit.
It is not expected that these requirements will lead to significant additional costs to charities, since they are already required to make their accounts and annual report available to the public on request. However it should be recognised that there will be some cost attached, as charities will be required to follow revised accounting standards and good practice in governance. This may lead to increased training costs for charity stewards and, where applicable, their staff. Additional time may be spent completing annual returns, although the regulator will be under a duty to minimise the burden of regulation.
The self-regulatory approach to fundraising practice may involve some further costs for charities involved in fundraising from the public. The charities sector will be expected to develop and establish an appropriate model for self-regulation, to review its effectiveness, and to ensure that fundraisers within the charities sector are properly trained to follow agreed Codes.
Option 3: Regulate charity activity in law
Option 3 would entail similar costs to option 2. The key difference would be that the charities sector will not be required to establish a self-regulatory mechanism, and this role would be undertaken by OSCR.
However, statutory regulation of fundraising could lead to some increased costs and lost income for charities in later years, if the system did not develop flexibly to suit the fundraising environment.
(ii) Costs for a typical charity
It is not possible for us to identify the costs to individual organisations at this stage. We would welcome your views on this. Our proposals aim to keep compliance costs to a minimum for charities, while ensuring that transparency of charities' activities is increased to improve public confidence.
5. Consultation with small business: the Small Firms' Impact Test
We do not expect that this draft Bill will have an impact on small firms or microbusinesses. None of the provisions of the Bill are directed at businesses, unless they are attached to charities or engaged in fundraising for charities. We would welcome your views on this.
6. Competition Assessment
The regulation of charities as set out in the consultation paper is not expected to have any impact on competition. It will make charities' activities and finances more transparent, and clarify the legal requirements of charities. However it will not distort or restrict competition within markets in which charities operate.
7. Enforcement and sanctions
The proposals set out in the Bill and consultation paper include a number of criminal offences which will lead to a fine on conviction. These include: fines for organisations representing they are charities when they are not registered by the regulator; fines for charity stewards who breach their duties; fines for organising a public benevolent collection without a licence. Fines will be levied by the courts on charity stewards (charity board members) rather than on the charity's own funds. The maximum fine for each offence ranges from level 3 to level 5.
The Bill also provides OSCR with powers to take civil action against charities which it has reason to believe are engaging in misconduct. OSCR will be able to investigate charities, and can then take direct action to suspend charity stewards, freeze charity assets, or direct charities to stop particular activities. It will have similar powers in relation to non-charities which are representing themselves as charities, or which are in possession of funds collected for charity. OSCR will only be able to take these direct actions for a maximum of six months, after which it will be required to go to the courts for extension. There will be a right of appeal to an Appeal Panel (or direct to the courts) against any of these actions.
The enforcement of the self-regulatory scheme for charity fundraising will be established by the charities sector. The charities regulator will keep an overview of its operation and advise the Executive accordingly.
8. Monitoring and review
The regulator will be tasked with reviewing implementation of the legislation and regulations, and advising the Executive of any need for change. The Executive will review the impact of the legislation and associated regulations within ten years of it coming into force.
9. Consultation
This draft RIA has been developed after extensive consultation and dialogue with the charities sector. More than 40 meetings with stakeholders, in addition to the consultative work of the McFadden Commission and the Scottish Executive Justice Department, have furthered debate on the options and regulatory proposals set out above. It is now produced for comment, alongside the draft charities Bill and its accompanying consultation paper. It has been distributed to a range of key stakeholders, including national and local voluntary sector intermediary organisations, representative bodies of particular groups of charities, professional bodies, local authorities, and all those organisations which have responded to previous Executive consultations on charity law reform.
It is also available on the Scottish Executive website consultations page.
We would value your comments on this RIA, along with your responses to the consultation, by 25 August 2004.
Summary RIA
Option | Cost | Benefit |
1 - No change | Continued threat to public confidence and therefore likely reductions in donations and volunteering | Fewer compliance costs |
2 - Foundation of statutory regulation with additional self-regulation | Training required for stewards, staff and volunteers Some additional time in completing and submitting annual returns, accounts etc Cost of developing self-regulation system (estimated by Buse Commission at 300,000 p.a. across the UK) | Improved public confidence More flexible regulatory system based on experience of practitioners, but safeguarding public interest |
3 - Statutory regulation only | Training required for stewards, staff and volunteers Some additional time in completing and submitting annual returns, accounts etc Additional compliance costs in fundraising regulation | Improved public confidence |
Based on the cost/benefit analysis above, and on the views of consultees so far, we recommend option 2 - a foundation of statutory regulation of charities, further developed by self-regulation of charity fundraising.
The attached draft Bill and consultation paper have been prepared based on this approach.
We encourage you to submit comments on this Regulatory Impact Assessment, and any evidence on costs and benefits that may inform the legislative process.
Cost assumptions related to key Bill sections
Section | Provisions to: | Costs to SE | Costs to LAs | Costs to charity sector/others |
1-2
Sch 1 | Establish OSCR as an independent statutory body | 3 million currently estimated running costs per annum | None | None |
3 | Create a publicly accessible register of all bodies eligible to operate as charities in Scotland | As s1 above | None
May have some benefits in terms of allowing local authorities to gather information efficiently for the processing of (PBC) licence applications | Should have a positive impact on charities' ability to raise funds from the public (currently charities in Scotland raise around 240 million from public donations) and from charitable trusts (recent estimates currently worth 60 million).Will create some additional administrative costs for charities subject to dual registration (impossible to quantify) |
4-6 | Require registration of all charities wishing to operate in Scotland | | Local authority-managed charities will be required to register - some administrative costs | Some administrative costs - impossible to quantify, but likely to be inconsequential |
7-8 | Definition of charity - remove presumption of public benefit | It is possible that more non-charitable voluntary organisations will seek charity status when the law becomes clearer. It is also possible that some current charities will seek to convert to non-charitable forms. LAs are currently required to provide 80% relief on non-domestic rates for charities, the cost of which is covered by the Executive. The charity sector currently grows at the rate of around 3 per day. This rate of growth may increase after enactment, but it is impossible to determine how many new charities will have premises and therefore require non-domestic rates relief. It is not likely to be a substantially greater number than the growth rate under the present system. | Likely to be cost neutral. LAs are currently required to provide 80% relief on non-domestic rates for charities, the cost of which is covered by the Executive. | Likely to be cost neutral Some existing charities may no longer meet the requirements of the law and would therefore lose charitable tax reliefs. New charities may be encouraged to seek registration and gain these reliefs for the first time |
9-11 | Empower OSCR to require a charity to change its name | As s1 above | Some administrative costs - impossible to quantify, but likely to be inconsequential | Some administrative costs - impossible to quantify, but likely to be inconsequential |
12 | Require that charities indicate their status on correspondence | As s1 above | Some administrative costs - impossible to quantify, but likely to be inconsequential | Some administrative costs - impossible to quantify, but likely to be inconsequential |
18 | Require charities to provide such information as OSCR requires, free of charge | As s1 above | Some administrative costs - impossible to quantify, but likely to be inconsequential | Some administrative costs - impossible to quantify, but likely to be inconsequential |
19 | Require charities to provide information to the public free of charge | None | This is already a requirement - however charities are currently able to re-coup their costs by charging. Will entail some administrative costs | This is already a requirement - however charities are currently able to re-coup their costs by charging. Will entail some administrative costs |
23 | Provide OSCR with a duty to co-operate with other regulators | As s1 above | Positive - OSCR will seek to work with local authorities and provide a useful single point of contact | Positive - should reduce the impact of the administrative burdens mentioned above |
24-25 | Empower OSCR to investigate any charity or body calling itself a charity | As s1 above | None | None likely - this just restates existing powers of the Crown Office. Some potential costs in additional training for stewards, staff and volunteers of charities in terms of the new requirements |
27 | Empower OSCR to suspend anyone running or working for the charity for up to six months | As s1 above | None | None |
27 | Empower OSCR to freeze bank accounts and restrict transactions entered into by a charity for up to six months | As s1 above | None | None |
28 | Create an offence for the body or person not to comply with such directions from OSCR under this part | As s1 above | None | None |
34-35 | Make provision for the redistribution of money held for charities in dormant accounts | As s1 above | None | Positive - funds held for charities will be returned to the original charity or passed on to a charity with similar purposes. |
36-37 | Require charities to provide OSCR with annual accounts | None | None | None - charities are already required to produce accounts. Additional postage costs only. |
36 | Require audit or independent examination of accounts for larger charities (thresholds to be set out in regulations) | None | None | None - regulations will be based on existing accepted practice within the charity sector |
36 | Regulations will set out the form of the accounts and thresholds; these will rely on the ASB SORP for charities as appropriate | As s1 above | None | None - regulations will be based on existing accepted practice within the charity sector |
38-42 | Establish a new legal form for charities - the Scottish Charitable Incorporated Organisation | As s1 above | None | Positive - will provide charities with a simple, accessible legal form of incorporation without the complexity and expense of dual regulation by the company regulator. It is estimated that around 5000 charities currently also have company status. |
43-49
Sch 2 | Provide a free, ad-hoc appeals panel for appellants against OSCR's regulatory decisions | 150,000 - 200,000 per annum estimated to run panel | None | Positive - it will no longer be necessary to take out expensive court action to appeal a decision |
50 | Create broad legal duties for charity stewards | Potential loss of 10 million charitable tax reliefs for NDPBs which currently have charity status | Independence issue may mean that local authorities are no longer able to control their charitable arms. | None - duties aim to clarify existing case law and good practice |
51-52 | Disqualify certain categories of people from the management or control of a charity | As s1 above | None | None |
53 | Continue to provide for the regulation of designated religious charities; DRC status will be designated by OSCR | As s1 above | None | None - the provisions re-state the current situation |
55-58 | To provide cheaper and more accessible avenues for the re-organisation of charities | As s1 above | Positive - local authority-managed small charitable trusts (several hundred) will be easily amalgamated and more efficiently administered | Positive - small charitable trusts will have a cost-free route to amalgamate or wind up their activities. Will allow more efficient administration of charitable assets |
59 | End separate provision for charitable educational endowments | As s1 above | None | None |
60-61 | Create an offence for a professional fundraiser or commercial participator to engage in fundraising for a charity without first having a written agreement with that charity | As s1 above | None | Cost neutral - based on existing good practice |
62 | Empower charities to prevent unauthorised fundraising in their name | None | None | Charities will incur costs in seeking injunctions - however, OSCR will have a power to do this by proxy |
63 | Regulations will require professional fundraisers and commercial participators to inform potential donors of the extent to which the cause or charity will benefit from their donation | As s1 above | None | Regulations will set out the form of the statement required. May require additional training of fund-raisers, and may restrict the fund-raising activities available to charities. However it will promote public confidence and may increase willingness to give |
64 | Provide powers for Scottish Ministers to regulate charity fundraising by establishing statutory codes of practice if they feel this is necessary. | As s1 above | None | May lead to increased administrative costs and training requirements |
65-67 | Refine the system of licensing public charitable collections by clarifying the definition of 'public place' and 'public benevolent collection' | As s1 above | May have some impact in terms of widening the scope of local authorities' powers to license PBCs - additional resources may be required to administer the system and deal with returns | Neutral - may impact on face to face (direct debit) fundraising by bringing it into the regulatory scope for the first time; may increase public confidence and willingness to give. Will have no effect on charity shops and collections of goods |
68 | Clarify the existing 'exempt promoters' system by establishing a 'designated national collectors' system to be designated by OSCR | As s1 above | Will aid local authorities to manage this system by clarifying its purpose and providing advice through OSCR | Positive - the system as clarified should allow national collectors to organise PBCs efficiently without impacting negatively on the capacity of collecting places for local charities |
73-75 | Provide for wider powers investment for trustees | As s1 above | None | Neutral - will provide wider powers of investment, meaning that trusts' investment income will be more closely linked to the general state of the investment market |