Charity regulation review: consultation analysis

Chapter 2: Parameters for a review

This chapter presents the analysis of six questions which explored the potential parameters of the review, including what topics it should cover and which aspects of regulation should be included. Q7 comprised three closed questions, which asked whether three aspects of charity regulation should be reviewed. Any open comments about these aspects have been presented under Q5 and Q6, where those comments were raised.

Q5. If a review of charity regulation is conducted, what topics should it cover and why?

Nearly four fifths (78%) of respondents answered Q5. Many respondents raised the topics that would be addressed by the technical workstreams. These are addressed in Chapter 3. Beyond these topics, the most prevalent themes that respondents felt should be included in a review were aspects of charity governance, finance and the need to simplify regulation.

Charity governance and trustees

Most prevalent was a theme, raised by many respondents, that the governance of charities, including trustee roles and responsibilities, should be included in the review. Several respondents specifically mentioned the need to review governance arrangements. Aspects mentioned in this regard included governance structures, accountability, transparency, conflicts of interest and leadership. One respondent called for the requirement to hold annual members’ meetings in single-tier SCIOs to be removed. Age Scotland called for it to be easier for small groups with limited incomes to gain access to legal advice and support. They suggested OSCR work with the Law Society of Scotland to consider what protections could be offered to such groups and their trustees in case of personal legal action. Similarly, attendees at a SCVO webinar queried if the review would cover liabilities of trustees for unincorporated organisations.

Aberdeenshire Voluntary Action TSI and Aberdeen Council of Voluntary Organisations TSI called for greater scrutiny of charitable status for public sector bodies, particularly Arms Length External Organisations (ALEOs), with an individual calling for a review of the role of Councillors on ALEOs and their relationship with Councils. One individual felt community development trusts should be subject to greater scrutiny.

Trustee roles and responsibilities were commonly mentioned in this theme. Specific aspects highlighted included:

• Having greater clarity on roles and responsibilities such as through having codes of conduct or detailed guidance.
• Declaration of interests.
• Trustee wellbeing, such as not being overburdened with responsibility, how private and public benefits are balanced, health and safety awareness, and how regulation supports a human rights approach.
• Trustees being aware of their responsibilities and appropriate behaviours.
• Improvements in recruitment, training and possibly requiring qualifications.
• Rules on remuneration.
• Clarifying what is meant by ‘acting in the best interests’ of the charity.

Attendees at the Law Society of Scotland Charity Law Sub-committee event suggested reviewing Section 66 of the 2005 Act, which sets out the general duty of care that charity trustees must follow. They highlighted this was different from company law and Trust law and called for alignment between these.

A few respondents, as well as attendees at various consultation events, felt increasing burdens placed on volunteers, particularly in the absence of paid staff, were impacting motivations to volunteer as a trustee. Attendees at a Scottish Government hosted webinar suggested that easing trustee duties could make the role more attractive. Volunteer Scotland highlighted that while the 2023 Act aimed to increase transparency and accountability, the requirement to publish the names of trustees could be off-putting, impacting potential willingness to serve as a trustee.

A few respondents highlighted the need to consider trustee diversity and how to improve this. For instance, those attending a SCVO webinar noted challenges in recruiting those with lived experience. Two respondents suggested that the role of founders in charities could be considered in any review focused on charity governance regulation. One respondent suggested charities with active founders should be required to have succession, or exit, plans in place in case the founder leaves. Attendees at a Scottish Government hosted webinar felt that charities should have at least one trustee based in Scotland if they had a Scottish charity number to increase transparency and accountability.

“Trustee recruitment, remuneration and diversity. Many charities struggle to recruit trustees with the necessary skills, experience and knowledge. Trustee diversity is particularly important, and many charities are looking to appoint board members who have lived experience of the issues that the charity exists to address. Under specific conditions and with the appropriate guardrails, remunerating trustees can be an effective means (one of many) to open up charity boards to more diverse trustees. The charity sector in Scotland needs more support – and more flexibility – to recruit from a wider pool of talented potential trustees.” – The Chartered Governance Institute UK & Ireland

“The roles and responsibilities of trustees - I am not confident that I know what my role is as a trustee.” – Individual

Charity finances

Aside from the audit issue raised in Chapter 3, many respondents indicated that financial issues should be included in any review of charity regulation. Views on what to include were wide-ranging and included:

• Investment portfolios.
• Reserves.
• Tax requirements and tax cuts.
• Receipts and payments accounts.
• Clarification of any qualifications required of independent examiners.
• Making accounting easier.
• Fundraising and charitable trading, including salaries of fundraisers.
• Financial and asset management.
• The Charities Statement of Recommended Practice (SORP) requirements (i.e. guidelines for accounting and reporting).
• The use and application of endowments.

A few respondents felt there should be a review of the Charities Accounts (Scotland) Regulations 2006 (as amended), for instance, to align requirements of companies with charities or to allow OSCR to issue a framework of directions to independent examiners as applies in other parts of the UK.

One respondent called for a simplification of the accounts charities are required to submit, suggesting a return to straightforward ‘income and expenditure’ reporting for small charities with an income of under £50,000 and assets of under £100,000. One event attendee suggested introducing a minimum income threshold for charity registration to help reduce the administrative and financial burden on smaller charities, suggesting such a threshold could be similar to that set by the Charity Commission for England and Wales, which requires a charitable body to have an income of at least £5,000 to be registered.

The Institute of Chartered Accountants of Scotland (ICAS) provided detailed comments on financial aspects requiring consideration, and readers are advised to refer to their published response for further information on these suggestions, for instance, on inconsistencies between accounting regulations and the 2005 Act in the scope of ‘statement of account’.

Challenges accessing financial expertise or bank accounts were raised by a few respondents, such as difficulties finding a suitable accountancy firm, auditors and independent examiners, or banks with affordable fee structures and timely action. This was also raised by attendees at various consultation events. One individual respondent, whose main area of work was charity accounting, perceived audit firms as preferring to prioritise organisations with larger incomes, and quoting ‘vastly inflated’ fees or being unwilling to give a quote to smaller charities. Similar issues were raised by attendees at the ACCA event who also felt audit fees had risen due to increased regulations required to carry out an audit. Attendees at the Scottish Churches Committee event also highlighted the increasing costs and complexity of undertaking audits.

SCVO and those attending a SCVO webinar highlighted it was hard to obtain accessible and suitable banking and noted increasing burdens, such as anti-money laundering legislation. One respondent noted bank closures could impact cash deposits by charities. Another organisation and attendees at a Scottish Government hosted webinar queried if there were plans to introduce secondary legislation to empower OSCR to use Section 47 of the 2005 Act to unlock dormant charitable assets from financial institutions in light of challenges posed by the banking sector.

“The Scottish Government should consider how long term core funding is managed to assist charities to enable them to take on the roles in the community that the Councils and state have given up. A comprehensive review of funding constraints is needed as several state agencies are now telling charities that they need to be more 'sustainable' and more entrepreneurial to reduce reliance on public sector funding.” – Broadford and Strath Community Company

“Audit thresholds need to be brought more in line with those of businesses as completely unfair at present. Reviewing the SORP regulations so these are easy to follow for charities and auditor. The current guidelines are complex, ambiguous and open to interpretation often putting charities at significant disadvantage depending on an accountant's interpretation of them, and also off-putting to accountants which results in charities struggling to secure an accountant.” – Deaf Links

“The role of receipts and payments accounts. Receipts and payments accounts often don't give a realistic view of the charity's finances. There needs to be greater clarification about what constitutes "voluntary receipts", "receipts from charitable activities", "cost of fundraising" - that clarification needs to be identical from OSCR, HM Revenue and Customs and accountancy bodies.” – Individual

OSCR role and powers

Many respondents commented on the need for regulatory matters to be part of any review, both in terms of strengthening regulatory activity and to consider OSCR’s role and powers. Aspects of regulation highlighted included the regulation of boards or founders, social enterprises and unincorporated groups. Some respondents felt the role of OSCR and its powers should be considered, such as ensuring sufficient powers were in place to address charity misconduct such as fraud or trustees in breach of their duties, or to swiftly close a charity if needed. One respondent queried whether there was a right of appeal against OSCR decisions, and attendees at the Third Sector Interface Network event queried whether the time taken by OSCR to respond to or process issues would be considered in any review.

“Powers of OSCR, including powers to propose transfer schemes and further powers for the appointment of charity trustees: the absence of regulations allowing OSCR to propose transfer schemes for approval by the Court of Session deprives OSCR of a valuable form of intervention where there has been charity misconduct; fuller provisions for the appointment of charity trustees modelled on those of the Charity Commission in England and Wales would enable OSCR to assist charities in a wider range of situations than allowed for in the new provisions of the 2023 Act.” – The Law Society of Scotland

Simplify regulation or reduce administrative burden

Simplifying requirements or reducing current demands, particularly for smaller charities, was suggested by many respondents as a focus of any review.

“While it is important for all charities to work within a regulatory framework, it is imperative that regulation is as straightforward as possible. Many charities are dependent on a small number of staff and governance volunteers so it is important that the burden of regulation reflects that while ensuring good practice in all areas of operation.” – Kyle and Lochalsh Community Development Trust

A few respondents raised the need to simplify the process for making changes to charities set up by Royal charter, covered in Chapter 3. Specific aspects mentioned included reviewing processes relating to cy-près schemes^[3] ensuring appropriate asset transfer arrangements, addressing inconsistencies between regulators such as cross-border issues or different regulatory bodies, simplifying the model constitution for SCIOs, ensuring the charity register is up to date, and providing clear definitions and processes, such as for ‘notifiable events’.

“There should be improved, formal alignment and coordination between the current, relevant regulators, i.e. OSCR, the CIC Regulator, the Scottish Housing Regulator and the Financial Conduct Authority, as well as organisations like the Freedom of Information Commissioner. This should be to simplify and bring clarity to regulation for charities and similar organisations and remove any unnecessary regulation, improve regulation for public accountability and openness and possibly devolve the powers of the UK-wide regulators to OSCR or another relevant body. With these steps there is significant scope to bring innovation, coherence and growth to similar charity and business models and help the movement provide additional economic prosperity and a wellbeing economy.” – Social Enterprise Scotland

“A review of the processes for making changes to the register and the requirement to notify OSCR of changes, in order to make processes as simple and accessible as possible in an increasingly demanding and challenging environment.” – Archdiocese of Glasgow

Process of becoming a charity

Many respondents felt the process of becoming a charity should be considered within any review. Suggested aspects to review included the charity test, considering whether too many charities were undertaking the same type of work to ensure charities have a distinctive purpose, different organisational structures governing charities and whether there is a need to consolidate these, incorporation to a SCIO (see 9B) and clarity around what criteria are required to become a charity or even what a charity is.

“The charity test - independence and disbenefit. Better articulation of what is a 'charity' in Scotland for those charities that operate across the UK.” – Individual

“Are there too many charities in Scotland doing very similar things? How could OSCR support sector become more business oriented to develop economies of scale, for example? Is it too easy to set up a charity?” – Individual

Changes in organisational structure

A review that considered charity reorganisation or changes in organisational structure was recommended by many respondents. Challenges included difficulties navigating requirements, legal or advisory fees, ‘technical roadblocks’ hindering restructuring and as noted by the consultation paper, asset transfers. Most commonly, respondents mentioned SCIOs: to make it easier to become incorporated, to change organisational type and to dissolve them, and to consider the interaction between SCIOs and other legal structures of charities. Attendees at a Scottish Government hosted webinar felt different charitable structures are confusing for the public.

“There should be a review of the charity reorganisation provisions, including restricted funds reorganisations, in the 2005 Act and consideration should be given to reform to make the process more straightforward. There should be a review of the provisions relating to SCIOs and, in particular, the current prohibition on a SCIO converting to another legal form and the fact that a SCIO can only amalgamate with another SCIO or transfer its undertaking to a new SCIO.” – Free Church of Scotland

Other suggestions included allowing easier conversion of a Community Interest Company (CIC) or Trust to a SCIO, making mergers or acquisitions easier and providing clearer guidance on dissolution, including how assets should be handled. For instance, attendees at a SCVO webinar called for clearer guidance around the suitability of community asset transfers being transitioned into a SCIO. One individual called for the establishment of an alternative legal form, an Association with Legal Personality, though did not give further detail on this.

“Review and assistance with legal and regulatory requirements for mergers, best practices for collaborations, and governance considerations during and after mergers.” – Stirlingshire Voluntary Enterprise (SVE)

“The register of mergers introduced in the 2023 Act only affects the automatic vesting of legacies. We believe that consideration should be given to extending this to other gifts and donations, a point which was resisted during the 2023 Act’s progress. The register of mergers is also tightly focused only on Scottish charities and does not allow mergers between charities across different jurisdictions within the UK.” – Charity Law Association

‘Public benefit’, public trust and volunteers

Many respondents raised issues around the public, such as a need to review the ‘public benefit’ part of the charity test and the need to consider how to increase public confidence and volunteer engagement. Suggestions included, in particular, the need to better define the meaning of ‘public benefit’, with one respondent noting there is no statutory definition of it in the 2005 Act. Public trust and confidence were also considered important by some respondents, indeed ‘crucial’ by attendees at a SCVO webinar. For instance, it was felt there is a need to promote confidence in charities through effective regulation or providing clarity over what events were notifiable. Attendees at the Scottish Churches Committee event perceived changes in the 2023 Act had diluted, rather than strengthened, the requirement to notify.

Less mentioned aspects included consideration of declining volunteer participation or volunteer views, membership and membership lists, the impact on the wider public such as trust and confidence in charities, and how public benefit balances with private benefit. However, comments on such aspects were generally brief with little further detail provided.

“Clarification of the definition of public benefit. A statutory basis for notifiable or concerning events, to provide clarity to office bearers with regard to what categories of event should be notified and when, and to provide confidence to the public that issues are being reported appropriately and investigated as necessary.” – The Scottish Churches Committee

“A framework and a culture needs to be established where the wider public should be actively encouraged to hold charities to account, particularly over the issue of charitable purposes and public benefit.” – Individual

Constitution and charitable purposes

Brief comments were left by several respondents to suggest charity constitutions should be included in the review. Where reasons were given, these included reviewing the procedures for changing a constitution, addressing ‘mission creep’ or straying away from the charity's objectives to obtain funding, and ensuring that the purpose of charities was clear and concise. Attendees at a Scottish Government hosted webinar noted corporate bodies were using the term ‘charitable’ but queried what this actually meant in practice. Similarly, attendees at a SCVO webinar felt a solicitor could argue charitable status for organisations the public does not consider charitable.

Suggestions were made as to what purposes should be included, such as:

• A few consultation respondents called for ‘the advancement of religion’ to be reviewed as a charity purpose. For example, The National Secular Society highlighted the exemption of such charities from certain provisions under the 2005 Act and felt this should be reviewed in light of recent child abuse cases. This purpose was also raised at a Scottish Government hosted webinar where it was suggested the purpose could lead to allowing misogyny.
• Social Enterprise Scotland felt fee-paying schools should not be charities.
• Campbell Stewart MacLennan & Co suggested consideration of whether support of economic development in rural areas should be covered as a charitable objective.

Other issues

Some respondents felt the review should be wide-ranging, with recommendations to ensure a comprehensive review (see Q6). Some other respondents felt activity and financial reporting should be included, such as the measurable benefits achieved or how charities are meeting their stated objectives. A few respondents highlighted the issue of Trust legislation needing to be reviewed, such as simplifying the process of converting to a SCIO, considering inactive Trusts, and reviewing the limit on trading activities.

Q6. What topics should a review of charity regulation not cover, and why?

40% of respondents left an open comment at Q6. The most prevalent theme was that the review should be wide-ranging or that nothing should be excluded. Thereafter, themes covered charitable purposes/the charity test, recent regulation changes, or specific suggestions on what to exclude. Some respondents left comments on how any review should occur, which have been incorporated into the analysis of responses to Q10.

The review should be wide-ranging or not exclude anything

Many respondents commented that any review should be well-rounded or did not consider any areas of regulation should be excluded. Comments were generally brief and did not tend to explain why this view was held. It was felt any review should not be limited, or that if stakeholders suggested areas to include, these should be part of it. The view that the review should be extensive was also raised at the Law Society of Scotland Charity Law Sub-committee event. Where reasons were provided, they included ensuring regulation remained fit for purpose and that it meets the needs of the voluntary sector.

“No topics should be excluded from the review. All topics of concern raised by stakeholders should be included. There has never been a comprehensive review of the system introduced by Part 1 of the 2005 Act and the opportunity for one now should not be wasted.” – The Law Society of Scotland

“We feel strongly that the review should cover the widest possible range of topics if the sector is to be listened to properly. Indeed, if the review sets out with a pre-determined set of topics, it runs the risk of ignoring concerns which might otherwise have come forward from the wider sector.” – Charity Law Association

Charitable purposes and charity test

Excluding the charity test or charitable purposes in any review was recommended by several respondents, including attendees at the ACCA event. Mostly, respondents were of the view that charitable purposes should not be reviewed. Reasons given included that these are clear and familiar to charities, they were well-established and formed the basis of work for charities and were already agreed with OSCR, that other issues were more pressing or that including these topics could have a detrimental impact on the types of activity that could legitimately be carried out. For instance, two respondents suggested that including charitable purposes could impact either social capital, or serve to ‘socially engineer’ the work of charities. Another two respondents felt the charity test more broadly should be excluded, in other words charitable purposes and public benefit.

“We do not believe that a review of charitable purposes is required. These have been agreed by OSCR and form the basis for the work carried out by charities throughout Scotland. Any changes to these purposes could have a detrimental impact on the types of charitable activity which could legitimately be carried out.” – The Scottish Churches Committee

Recent regulatory changes or consultations should be excluded

Some respondents, mainly organisations, left brief comments suggesting anything covered in recent consultations, notably those leading to the 2023 Act, should be excluded from any review. The Chartered Governance Institute UK & Ireland felt recent consultations had led to positive outcomes relating to OSCR, but that time was now needed to “communicate, understand, implement and embed these changes.”

Specific aspects to exclude

Recommendations to exclude certain aspects of regulation were made by several respondents. A few respondents cautioned against aspects of any review that might add further complication or burden to charity regulation. Two respondents felt SORP requirements should be excluded, with one of these also suggesting receipts and payments accounts should be excluded.

Other specific areas highlighted for exclusion by singular respondents were disciplinary procedures against non-reporting charities and duties of trustees. Three organisations left comments on the role of OSCR, with one respondent calling for it to be adequately funded to fulfil its role and the others suggesting no change was needed.

“The only topics which might be considered out of place would be those where the Scottish Parliament does not have legislative competence (but these are likely to be limited if the review is focused purely on charity law and regulation), or where there are other mechanisms to feed into review processes (for example, through the Charity SORP Committee for accounting formats and principles).” – Charity Law Association

“Excessive Micromanagement, e.g. while financial transparency and accountability are crucial, the regulation should not delve into micromanaging every financial transaction or minor financial decision. Over-regulation in financial matters can lead to excessive administrative burden and divert resources from critical charitable activities.” – Stirlingshire Voluntary Enterprise (SVE)

Q7A. Charitable purposes: Should this aspect of charity regulation be reviewed?

Just over half (54%) of those answering Q7A agreed that charitable purposes should be reviewed; 34% disagreed and 12% were unsure. Individuals were more likely than organisations to feel it should be included (58% compared to 49% respectively). Agreement varied by type of organisation, from 40% among professional advisors to 71% among umbrella, infrastructure and membership bodies.

Q7B. Public benefit: Should this aspect of charity regulation be reviewed?

Among those answering Q7B, 57% agreed that public benefit should be included in the review of charity regulation; 29% disagreed and 14% were unsure. While similar levels of agreement were recorded by individuals (58%) and organisations (56%), organisations were less likely to disagree (24% compared to 33% of individuals) and more likely to be unsure (20% compared to 9% of individuals).

Q7C. Charity trustee duties: Should this aspect of charity regulation be reviewed?

69% of respondents answering Q7C agreed that charity trustee duties should be included in the review; 18% disagreed and 13% were unsure. Support for including this aspect of charity regulation was higher among individuals (78%) than organisations (60%), with the organisations being more likely to be unsure (24% compared to 4% of individuals).

Q8. Is there anything else you think should be included in a review of charity regulation? Please explain what and why

Over a third (35%) of respondents left an open comment on other aspects they believed should be included in any review. Some of the issues raised in Q8 are covered by other questions, so views have been incorporated into other sections to avoid repetition. These included in order of prevalence, governance or trustee responsibilities (Q5), audit threshold (Q9C), finance (Q5) and charitable purposes (Q5). Aside from these, the themes raised were that greater regulation was required and more general comments or views on charity employees.

Regulation is needed

Some respondents felt that strengthened regulation was needed, though these comments were generally brief, such as stating: ‘enforcement’, ‘penalties for failing charities’ and ‘adequacy of the complaints process’. Suggestions for improvement included publishing outcomes of investigations, updating OSCR guidance to ensure consistency in its application and introducing an independent trustee role or requirement to select a local legal or financial person whose role would be to ensure compliance and transparency.

“We … think that a focus on how OSCR uses its powers to apply the current rules may be beneficial, and believe that a wide review which is responsive to the sector should be open to hearing any sector concerns in relation to those areas.” – Charity Law Association

Comments on charity employees and volunteers

Safeguarding and disclosures for staff and volunteers, as well as accountability structures for staff, discrimination against staff and employee benefits were suggested by some respondents to be included in any review. Comments were generally brief and did not go into detail.

"Enhanced disclosures conducted on all levels of staff. All charities should have a maximum number of volunteers and paid staff (if any) to ensure fair and just resource allocation." – Individual

Other views

A few respondents left more general comments. These included two respondents who felt efforts should concentrate on supporting charities to achieve sufficient funding to enable them to focus on delivery, such as multi-year funding. One respondent felt regulation appeared fit for purpose as it was and another felt that charities were becoming less likely to challenge or critique government and funders and felt this should be addressed.