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These websites for each chapter update the 3rd edition of The Russell-Cooke Voluntary Sector Legal Handbook by James Sinclair Taylor and the Charity Team at Russell-Cooke Solicitors, edited by Sandy Adirondack (Directory of Social Change, 2009). The websites are not intended as a comprehensive update and should not be treated as such.

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Chapter 58
INVESTMENT AND RESERVES

HODGSON RECOMMENDATIONS ON SOCIAL INVESTMENT BY CHARITIES

Updated 23/8/12. This information updates s.58.5 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
THIS ARTICLE NEEDS TO BE UPDATED, WHICH WILL BE DONE AS SOON AS POSSIBLE.
In his review of the Charities Act presented to Parliament on 16 July 2012, Lord Hodgson made the following recommendations in relation to social investment by charities, and the government commented on some of them in its interim response on 3 November 2013. The government's full response will include consideration of the Public Administration Select Committee's report on its inquiry into the Charities Act 2006 and the regulation of charities, which was published on 6 June 2013.

Unlike ordinary investment, which is an outlay with the purpose of generating a financial return, social investment is dual purpose: an outlay to generate income, but also to achieve charitable or social objectives.

• The rules governing investment by charities (in the Trustee Act 2000) should be amended to the following effect:
  a. As the primary duty on charity trustees is to further the purposes of their charity, trustees are entitled to consider the totality of benefit that an investment is expected to provide, in terms of both financial and social benefit, when making investment decisions;
  b. The term "investment", for these purposes, includes any outlay of money where the charity expects some form of financial return, whether or not that is the primary motive for making the outlay;
  c. The other existing principles governing investment (the standard investment criteria, requirement to review investments and duty to take advice) in the Trustee Act 2000 should continue to apply. [Chapter 9 recommendation 1]
  Sandy's comment: These recommendations and the ones following are very significant, integrating social investment into a comprehensive legal and regulatory framework and making it clear that charities can invest for the dual purpose of generating income and achieving charitable or social objectives. Lord Hodgson sees this as an opportunity for the UK to become the world centre of excellence in social investment.


• The government should also consider an amendment to the Trustee Act 2000 to draw attention to the distinct responsibilities imposed on the trustees of charitable trusts as opposed to private trusts (i.e. the need to further charitable purposes rather than simply preserve capital). [Chapter 9 recommendation 2]


• The government should introduce a legal power for non-functional permanent endowment to be invested in mixed purpose investments, with the requirement that capital levels must be restored within a reasonable period. [Chapter 9 recommendation 3]


• The government should work to develop a standard social investment vehicle to allow funding from different sources to be invested, and maintained separately, in the same product. [Chapter 9 recommendation 4]


• The private benefit requirement in relation to investment should be reworded to "necessary and proportionate", although the Charity Commission should produce clear guidance on this change to ensure it does not undermine the wider public benefit principle. [Chapter 9 recommendation 5]


• The charities SORP should be revised to facilitate the appropriate reporting of social investments. As part of this, the professional accountancy bodies should identify a standard system for valuing social investments; one possibility might be that trustees' valuation is used until a reasonable period of operation has elapsed to allow investments time to demonstrate their merits. The approaches followed in the early years of the private equity industry, which faced similar challenges, might usefully be considered. [Chapter 9 recommendation 7]


• The government should consider amendment to the Financial Services Bill to provide a statutory and regulatory underpinning to social investment. [Chapter 9 recommendation 8]


• Charities should be able to apply to HMRC for a prior clearance on tax treatment ahead of the making of an investment; in time, as the market matures, HMRC should provide clear guidance on the tax treatment of different types of social investment. HMRC should also consider establishing a specialist unit for handling social investment issues. [Chapter 9 recommendation 9]


• The government should consider ways of revising financial promotion rules to allow social investment advice to be given. Proportionate approaches to promotions requirements for low-value deals should also be investigated in order to free up the lower end of the investment market without undermining important consumer protections. [Chapter 9 recommendation 10]


• The FSA should consider establishing a specialist unit to deal with the challenges of social investment — for both the investor and the investee. [Chapter 9 recommendation 11]


• The term "mixed motive investment" should be replaced with "mixed purpose investment" to provide the general public with a clearer understanding. [Chapter 9 recommendation 12]

HODGSON RECOMMENDATIONS ON PERMANENT ENDOWMENT HELD BY CHARITIES

Added 23/8/12. This information updates ss.24.3.3 & 58.8.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
THIS ARTICLE NEEDS TO BE UPDATED, WHICH WILL BE DONE AS SOON AS POSSIBLE.
In his review of the Charities Act presented to Parliament on 16 July 2012, Lord Hodgson made the following recommendations in relation to permanent endowment held by charities, and the government commented on some of them in its interim response on 3 November 2013. The government's full response will include consideration of the Public Administration Select Committee's report on its inquiry into the Charities Act 2006 and the regulation of charities, which was published on 6 June 2013.

Permanent endowment is money held on condition that it cannot be spent (so only the interest or dividends it earns can be spent), property held on condition that it cannot be sold, or property held on condition that if it is sold, the proceeds from the sale cannot be spent. However in certain limited circumstances the Charities Act allows the trustees to decide to spend money or sell property held as permanent endowment, and in other circumstances the Charity Commission can authorise expenditure or sale.

Lord Hodgson's recommendations are:

• The position on access to permanently endowed funds in the event of insolvency to meet properly incurred liabilities should be rationalised between charitable trusts and companies. It is broadly accepted that this option is open to charitable trusts (provided the permanently endowed property is not a separate charity), though not to charitable companies. The issue of whether property held under a special trust (a trust with narrower purposes than the charity's general ones) should also be available upon insolvency could also be addressed. [Appendix A recommendation 7]


• Consideration should be given to reducing the current three month period in which the Charity Commission may object to resolutions to enable larger charities to spend permanent endowment to 60 days, with a power for the Commission to extend its deadline for objection if it considers there to be good reason for doing so. [Appendix A recommendation 18]


• The power for the trustees to spend permanent endowment without the need for the Charity Commission's approval should be revised. The Law Commission will need to consult on where the right balance lies, but a significant increase should be considered — perhaps assets of £100,000 [rather than the current £10,000) and an income of £10,000 [rather than the current £1,000]. [Appendix A recommendation 27]
  Sandy's comment: Bates, Wells and Braithwaite Solicitors comment, "This could be of significant assistance to charities wishing to free up their permanent endowment funds but needs to be balanced with concerns donors may have that funds given by them for a specified purpose could, up to quite a high value, be used in contravention to the donor's wishes. A lower threshold of say £25,000 would, in our view, strike a better balance between the needs of charities and donors."

SANDY ADIRONDACK
Governance and legal training and consultancy
for the voluntary sector
39 Gabriel House, 10 Odessa Street, London SE16 7HQ
Tel 020 7232 0726; fax 020 7237 8117
Email:
Web: www.sandy-a.co.uk