Governance of NHS endowment funds: review report

Chapter 1: Introduction and Background

Background and historic context

1.1 There are sixteen NHS-linked charities in Scotland, as listed in Appendix 1. Each charity is registered with OSCR, the Scottish Charity Regulator.

1.2 As at 31 March 2019, these sixteen charities held net assets totalling £301m.

1.3 The current legislative basis for NHS-linked charities in Scotland is contained in section 83(1) of the National Health Service (Scotland) Act 1978 (the 1978 Act). This gives power to a Health Board "to accept, hold and administer any property on trust for purposes relating to any service which it is their function to make arrangements for, administer or provide, or to their functions with respect to research."

1.4 The underlying legal entity of each NHS-linked charity is therefore a trust.

1.5 The charitable funds held in these sixteen charities in some cases pre-date 1978 and indeed the formation of the National Health Service in 1948. Pre-NHS philanthropy contributed to the founding of some of Scotland's oldest hospitals. In 1729 the very first Edinburgh Infirmary opened, paid for by public funds after an appeal was launched by the Royal College of Physicians of Edinburgh^[3]. The donations and legacies which supported the Royal Hospital for Sick Children also paint a picture of nineteenth century philanthropy:

"Lady Jane Dundas made the exceptionally generous donation of £6500 to build and furnish one wing of the new Hospital, naming it the Lady Caroline Charteris Memorial Wing, after her sister. Colonel W. Lorimer Bathgate, one of the Directors…….endowed enough to fund the "Bathgate Ward" in memory of his sister Thomasine, and another Director left enough to fund a ward which was named the "Mackay Smith Ward" after him."^[4]

1.6 With the arrival of the National Health Service in 1948, healthcare became a universal national provision, funded by taxes. It was not however the end of healthcare-focused donations and legacies, which continue to this day and are accounted for separately within these sixteen NHS-linked charities, as required by the 1978 Act.

1.7 Set against this backdrop from the eighteenth century onwards, it is therefore clear to see that the provision of healthcare in Scotland has always benefitted from the generosity of those who make donations or leave legacies.

More recent history

1.8 The 1978 Act underpins the governance and charitable purposes of the sixteen NHS-linked charities. The charitable purposes reflect the statutory purposes of the NHS itself set out in section 1(1) of the 1978 Act: "…to promote in Scotland a comprehensive and integrated health service designed to secure –

(a) improvement in the physical and mental health of the people of Scotland, and

(b) the prevention, diagnosis and treatment of illness,"

It is a matter of long established practice that for those NHS-linked charities linked to a Health Board in a particular geographic area, the NHS-linked charity tends to reflect that geographic focus in its activities. Although the charitable purposes of all NHS-linked charities are in effect Scotland-wide, there is no difficulty with the practice which has emerged for the NHS-linked charities operating in this way. The narrower geographic focus of fourteen of the charities can be seen in their names listed in Appendix 1.

1.9 In line with the 1978 Act, the charity trustee of each NHS-linked charity is the related NHS Health Board, as a single corporate trustee. This means the same individuals who are board members of the NHS Health Board also act as officers of the corporate trustee of the related NHS charity. As a result of this overlap, there is an inherent conflict of interest where the interest of the NHS Health Board conflicts with the interest of the NHS-linked charity of which it is also the trustee.

1.10 This conflict of interest places the Health Board (acting as charity trustee) in a very sensitive position, with regards particular spending decisions it may choose to make with one hat on or the other. Since the charitable purposes of the NHS-linked charity match the statutory purposes of the NHS, the same item could represent valid expenditure by:

• the Health Board in relation to its NHS budget, or
• the Health Board as corporate trustee of the NHS-linked charity.

To seek to address this, practice has evolved to try to characterise an item of spend as being either:

• 'core' (and therefore to be publicly funded by the NHS) or
• 'non-core' i.e. an enhancement or addition to core provision (and therefore more suitable for the NHS-linked charity to fund).

This distinction is not one which charity law requires or recognises, since a wide range of expenditure with unrestricted funds would be considered to be in line with the NHS-linked charity's purposes. It is however an aspect of practice which has evolved as a means of trying to distinguish what the NHS-linked charity will provide funding for, and what the NHS provides, albeit with many grey areas in between. One might conclude that it reflects the existence of the conflict of interest of the decision-makers, where a route to managing that is to attempt to delineate core spend on the one hand, and non-core (and therefore charitable) expenditure on the other. More is said about this in section 5.39.

1.11 It is therefore easy to see that the 1978 Act places a Health Board in a difficult position by requiring it to hold these dual roles. It leaves a Health Board open to potential criticism for spending decisions it may make as charity trustee, if in some way the NHS-linked charity is seen to 'prop-up' the finances of the Health Board. This is exactly the backdrop to events which resulted in an inquiry in 2018 by OSCR^[5], the Scottish Charity Regulator, into decision-making in 2014 by a charity, Tayside NHS Board Endowment Funds. The inquiry found that the Health Board (in its role as charity trustee) was effectively acting to meet a deficit incurred by the Tayside Health Board in its provision of NHS services. More is said on this in 1.16.

1.12 Although the establishment of this present Review in 2019 came just two months after OSCR published its Inquiry Report into Tayside NHS Board Endowment Funds, the case for change has been building for almost a decade.

1.13 In 2010, OSCR examined the charitable status of Lothian Health Board Endowment Fund as part of a review of the charitable status of selected charities on the Register. That review recommended "the charity take steps so that its charity trustees could demonstrate they were able, at all times, to fulfil their duties under the 2005 Act. The charity had to be able to show that, in a situation of conflict where the charity trustees' duty to the other body might influence how it used its funds, the charity trustees would decide only on the basis of the charity's interests and not the needs of the other body." (Who's in Charge, page 13) OSCR asked Lothian Health Board Endowment Fund to take a number of steps, which were put in place, relating to the induction process for trustees; a conflict of interest policy; and practical arrangements to show the public that the charity was acting autonomously, for example by taking its own independent legal advice and holding meetings separately from those of the Health Board.

1.14 In 2011, this case study was subsequently included in OSCR guidance entitled 'Who's in Charge: Control and Independence in Scottish Charities'^[6]. In Chapter 2, OSCR identifies "certain structures and relationships that are more likely to lead to problems for charities as regards control and independence." It goes on to illustrate this with an example of a charity which is closely linked to another body and many of the same people are on the two boards. This is the case with the sixteen NHS-linked charities and the related Health Boards, in terms of the complete overlap of individuals involved.

1.15 Shortly after this, a different regulatory driver for change prompted further review. HM Treasury's Financial Reporting Advisory Board concluded in 2011 that the financial statements of linked charities such as NHS Endowments would require consolidation into the related NHS Health Board. A Steering Group was established in NHS Scotland to consider this. In the Group's 2013 Report, which had an accountancy focus with some related governance outputs, certain templates were shared including a Charter, Standing Orders and Endowment Fund Operating Instructions. These templates were shared as best practice examples, for use and adaptation locally, given that the NHS-linked charities had - and continue to have - no legally binding governing document.

1.16 In 2014, Tayside NHS Board Endowment Funds made a temporary variation to its policy and procedures to allow it to consider retrospective funding applications, which resulted in £3.6m being paid out to cover a range of projects where Tayside Health Board faced a deficit. This came under scrutiny in an OSCR Inquiry report published in February 2019. OSCR found there was mismanagement in the administration of the charity, with decision-making which "did not reflect a sufficient degree of detachment from Tayside Health Board or recognise that the charity's interests should be considered separately from those of Tayside Health Board." The money was later repaid in full by the Health Board to the charity.

1.17 In July 2018, an independent review was published by Grant Thornton UK LLP on agreed areas of NHS Tayside financial governance arrangements between the financial years 2012/13 – 2017/18. This report found:

"As the Trustees were all NHS Board Members we did note that the differing responsibilities become blurred over the period of time." (Page 23)

1.18 On 5^th April 2019, in response to the OSCR report on the inquiry into Tayside NHS Board Endowment Funds published two months earlier, Jeane Freeman, Cabinet Secretary for Health and Sport, announced this present Review of Governance of NHS Endowment Funds.

1.19 On 29^th May 2019, The Public Audit and Post-legislative Scrutiny Committee of the Scottish Parliament published a report on the 2016/17 and 2017/18 Audits of NHS Tayside^[7]. It took evidence on the 2014 decision-making in Tayside NHS Board Endowment Funds. Its report states "The Committee agrees that there is a conflict of interest where the trustees of the endowment funds are the same individuals as the members of the NHS Board. The Committee therefore support the proposal from OSCR for the National Health Service (Scotland) Act 1978 to be reviewed by the Scottish Government with a view to ensuring that at least a majority of those in management and control of the endowment funds are independent of the relevant NHS board." (page 35)

1.20 It is important to conclude these introductory comments with some reassurance about practice in the broad group of NHS-linked charities in Scotland. In connection with its 2018 inquiry into Tayside NHS Board Endowment Funds, OSCR looked at the activities and governance of the 15 other NHS-linked charities. This included analysis of the charities' annual reports and accounts since 2014 and board meeting minutes. OSCR stated "The picture that has emerged from our analysis is generally positive and encouraging, and we hope this will help reassure existing and potential supporters of these charities. By and large, the NHS endowments charities in Scotland have appropriate charters, operating instructions, policies and terms of reference in place."^[8]

Format of the Review

1.21 The format of this Review was shaped by the Chair and involved a core Project Group, whose members are identified in the Terms of Reference for the Review in Appendix 2.

1.22 The aim of the Review, as set out in the Terms of Reference, is to provide a report to the Scottish Government to identify the preferred option to strengthen the governance of the NHS Endowment Funds and to ensure that the management and control of these charitable funds is able to be independent of the relevant Health Board.

1.23 To ensure all sixteen NHS-linked charities were involved in the Review, a representative from each participated in a Reference Group, which met to provide insight and input and to receive updates on the work of the Review. The Reference Group members are identified in Appendix 5.

1.24 To support the work of the Review, two specialist sub-groups were formed to consider in detail the technical legal and accounting aspects involved.

1.25 The Chairs and Directors of Finance of NHS Health Boards have regular scheduled meetings. The Chair of the Review took the opportunity to attend a meeting of Chairs and a meeting of Directors of Finance, as well as a meeting of the Technical Accounting Group, to share updates on the work of the Review, to invite input and to answer questions.

1.26 Representatives from the sixteen NHS-linked charities also meet in a shared forum called the 'Endowment Network'. The Chair of the Review attended a meeting of this Network to share updates on the work of the Review, to invite input and to answer questions.

1.27 In addition to these larger meetings, the Chair held a number of one-to-one and small group meetings on specific topics or with specific stakeholders. This enabled particular issues to be considered in more detail, such as VAT; the interests of the smaller NHS-linked charities; inviting views from non-executive Health Board members; and bringing the voice of donors and a clinician into the Review.

1.28 The draft recommendations were shared with the Reference Group in September 2019, to invite feedback.