SCOTTISH CHARITABLE INCORPORATED ORGANISATIONS (SCIOs) - INTRODUCTION AND CONTEXT
Legislative context
1. The Charities and Trustee Investment (Scotland) Act 2005 provides a modern, proportionate regulatory framework designed to support and encourage charitable activity in Scotland, whilst building public confidence in the charity sector. As with other Acts of the Scottish Parliament, the implementation of the Act has been a phased process.
2.. Chapter 7 (sections 49 to 64) of the 2005 Act establishes the Scottish Charitable Incorporated Organisation (SCIO), which is a legal form designed specifically for charities to enable them to become a corporate body, without having to become a company or industrial and provident society. SCIOs would be regulated by the Office of the Scottish Charity Regulator (OSCR).
3. Under section 64, Scottish Ministers may make Regulations to set out further provisions on SCIOs such as the application process, the administration of SCIOs, amalgamations, transfers, the winding up, insolvency or dissolution of SCIOs, the maintenance of other registers of information on SCIOs or as they see fit.
Development of the SCIOs concept
4. There are a number of legal structures under which charities can be set up but, increasingly, corporate rather than unincorporated structures, are utilised. Among the advantages of incorporation, there is the additional clarity surrounding the capacity and powers of an incorporated body; the personal insulation for members and managers of an incorporated body from the financial liabilities; and the increased confidence for those dealing with an incorporated body to assess the credit risk of doing so.
5. However, it is questionable whether company legislation provides the ideal model for the incorporation of charities and other third sector bodies that are non-profit distributing. Disadvantages of incorporation for charities include onerous disclosure requirements; regulatory regimes on insider dealing, shareholder rights, and industrial democracy; the burden of dual registration, reporting and regulation; a corporate governance regime tailored to meet the practicalities of the commercial sector, rather than the different ethos of charities; and a role for members which assumes that each member has a financial interest in the company.
6. The Reports of the Deakin and Kemp Commissions in 1996 and 1997 on the future of the voluntary sector had proposed that there should be a separate vehicle for incorporating charities. Following a fundamental review of company legislation in 2001, the independent Company Law Review Steering Group concluded that there should be a new vehicle for incorporating charities and that this vehicle should be exclusively for charities, offering all benefits of incorporation, including limited liability without the need for separate regulation. A new incorporated legal form for non-charitable social enterprises, the community interest company, was created under the Companies (Audit, Investigations and Community Enterprise) Act 2004.
7. The Scottish Charity Law Review Commission ("McFadden") endorsed the DTI proposals and recommended that the CIO model should be made available to Scottish charities. The draft Charities and Trustee Investment (Scotland) Bill included provisions to create a new legal entity, the Scottish Charitable Incorporated Organisation (SCIO). In consultation on the draft Bill, there was strong support for a tailor-made incorporation vehicle for charities in Scotland, that was as clear and straightforward as possible and, consequently, chapter 7 of the 2005 Act provides for the creation of a regime for SCIOs.
8. The SCIO potentially offers a simpler form of incorporation, with the greater business benefits that this brings, as well as protection from personal liability but without the burden and cost of dual regulation, currently endured by charitable companies. In particular, the SCIO would have the benefits of:
· Single registration. A charitable company has to register with the Registrar of Companies and with OSCR, whereas the SCIO will only need to register with the OSCR;
· Less onerous accounts preparation and reporting requirements. SCIOs will be subject to the standard charity accounting regime and will only prepare an annual report under the 2005 Act. Charitable companies have to prepare a directors' report under company law as well;
· Less onerous filing and monitoring requirements. SCIOs will only have to send accounts/reports/returns to OSCR. Charitable companies have to send them both to OSCR and to the Registrar of Companies;
· Less onerous requirements relating to the reporting of constitutional and governance changes. SCIOs will be subject to a less extensive range of reporting requirements than are charitable companies, and will only have to report to OSCR, rather than both to OSCR and to Companies House;
· Lower costs. OSCR, unlike the Registrar of Companies, does not make any charges for registration, and filing of information;
· A legal framework which is designed specifically with charities in mind.
Charitable Incorporated Organisations (England and Wales)
9. Similar provision has been made in UK legislation for new Charitable Incorporated Organisations (CIO) in England and Wales. The Office of the Third Sector (UK Government) and the Charity Commission are currently developing subordinate legislation to implement a CIO regime, which they plan to publish for consultation later this year. We understand that they intend the CIO to become available as a form for charities in England and Wales early in 2009. (Similar proposals for a CIO regime in Northern Ireland are contained in the Charities Bill, which is currently awaiting Royal Assent).
10. The Scottish Government's Charity Law Team, working closely with colleagues in OSCR, has monitored developments and considered preliminary drafts prepared by the Office of the Third Sector. However, in advance of the publication of the UK Government consultation, we are not at liberty to disclose details of the proposed CIO regime. While it is clear that the policy development process on CIOs is some way ahead of our own deliberations on SCIOs, and, indeed, has been underway for a number of years, we would not advocate rushing forward on what is likely to be a very complex set of provisions. Rather, we would wish to ensure that the regime we develop is thoroughly thought-through, robust, as straightforward as possible and tailored to the needs of charities in Scotland. Among the questions to be considered in the development of a Scottish regime is the extent to which it would be practical or desirable to base a devolved set of provisions on largely reserved legislation (i.e. company law).
Scottish Charitable Incorporated Organisations (SCIOs) Working Group
11. The provisions in the 2005 Act provide the basic legal framework for a SCIOs regime, with much of the detailed operational requirements to be set out in Regulations. While this allows us greater freedom to design a regime best suited to charities in Scotland it also means that much of complex administrative detail remains to be developed, perhaps most significantly, around winding-up and insolvency. The principal challenge is to create a structure that is as straightforward as possible for its users but still provides the necessary accountability and governance safeguards. In view of the potential complexity of developing the detailed statutory arrangements for this new legal form, Ministers agreed that an independent group should undertake an analysis of the original policy drivers and cost-benefit balance to assess whether, and, if so how best, any new vehicle could deliver the straightforward incorporation vehicle intended, without unduly burdening charities and the Regulator with excessive administrative requirements. In setting up a short-life Working Group, we would be seeking to bring together experts in corporate and charity law, as well as practitioners, those best placed to inform the policy development process to provide a uniquely Scottish perspective on the best means of taking this forward.
12. To briefly summarise, our principal reasons for establishing this Working Group are as follows:
- The SCIO is a new and unique legal form. The complexities surrounding legal forms are such that we consider that the policy development process would be greatly enhanced by the participation of legal experts and practitioners in the field.
- The SCIO should be tailored to the needs of Scottish charities and it may not be appropriate that they simply mirror the CIO regime in England and Wales. Without going into the detail of the proposed CIO provisions, which may yet be subject to change, our initial view is that a different approach may be required in Scotland. While the initial concept design and development of SCIO provisions for the 2005 Act borrowed heavily from parallel provisions for CIOs, the detailed regulatory framework may now require a more distinctly Scottish approach and its development should be shaped, to a large extent, by those who will operate and use it in Scotland.
- The SCIO regime should be user-focused and have stakeholder and third party buy-in. By engaging the potential "users" of the regime at the very outset, we hope to ensure that the system is designed with them in mind. Beyond the charity sector, there needs to be acceptance from the legal and financial professions, responsible for advising charities, as well as commercial organisations and funders.
- The SCIO regime should not be administratively burdensome or resource-intensive for charities or OSCR. To ensure that the original policy intention of creating a straightforward, purpose-built vehicle of incorporation for charities is met, a cost-benefit analysis should be independently undertaken to determine whether the regime could deliver a streamlined regulatory mechanism that is not overly cumbersome for the regulator or the regulated.