Throwing the Book - the Charity Commission wheels out its regulatory arsenal

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27 June, 2017

On Friday, the Charity Commission published its Inquiry Report following lengthy engagement with an educational charity governed by trust deed. The principal activity of the Rabia Educational Trust is the operation of an independent school and its charitable objects are "to advance the education of boys and girls in accordance with the Holy Quran and the Hadith according to Sunni Islam.

The Commission had been attempting to engage with the charity from as early as 2012 in connection with the following numerous concerns, which read very much like a caricature of "how not to run a charity":

  • the trustees of the charity persistently submitted its accounts and annual returns late;
  • the trustees could not demonstrate compliance with the charity's governing document with regard to decision making;
  • they could not demonstrate sufficient accounting records to explain all of the charity's financial transactions;
  • they had failed to meet the requirements of other regulators (in this case Ofsted and the DfE);
  • they were slow to engage with the Commission's early involvement and their responses to specific requests lacked sufficient detail on actions taken (the charity blamed an Ofsted inspection - which did nothing to appease the Commission, who rightly commented that the trustees were under an obligation to discharge all of their legal duties to all regulators);
  • they failed to comply with an action plan issued by the Commission in 2015;
  • they failed to respond in a meaningful way when the Commission requested an update in 2016;
  • they did not seek section 117 consent from the Commission for renting out part of the charity's office space to a private nursery run by its chair;
  • they did not register at the Land Registry its granting of a 99 year lease in an old public house to another registered charity (which lease had been drafted without legal or professional advice, and did not provide for continued access for the school, when the trustees believed that it did);
  • they disposed of a gym operated by the charity to a CIC that is connected to one of the trustees (although the charity appears to have retained the lease);
  • the charity was not banking around 40% of its income and was paying some of its staff in cash;
  • the school was judged by Ofsted to be "inadequate" following unannounced visits in 2014, 2015 and 2016. A further unannounced inspection in 2017 found that the "quality of leadership in and management of schools" standard (and others) remains unmet.

This example demonstrates the Commission's array of regulatory powers, with the following measures being employed before the statutory inquiry was commenced:

  • Informal contact with the trustees from 2012 in relation to the late submissions of accounts and annual returns;
  • Compliance visits and meetings with trustees in 2013, 2014 and 2015 to assess internal controls;
  • Obtaining copies of the charity's bank statement from its bank under section 52 of the Charities Act 2011;
  • Issuing an action plan in 2015 to address concerns regarding internal governance, decision-making processes, financial record-keeping and compliance with other regulators.

The section 46 Charities Act 2011 Inquiry itself began in earnest on 2 May 2016 after the trustees failed to respond to the deadline provided in the 2015 action plan. The inquiry found that the charity's administration, governance and management was not fit for purpose but that the trustees have now taken appropriate steps to address the shortfalls identified. The Commission noted that there is still work for the trustees to do in order to satisfy the Commission that it is capable of operating the school compliantly. The inquiry therefore directed the trustees by a section 84 Charities Act 2011 order to take specific actions to ensure regulatory compliance and to regularise the deficiencies in a number of third party agreements. The Commission will no doubt monitor the charity's compliance with the section 84 order and may well take further steps in the future.

The entire report smacks of a charity's trustees not being entirely aware of their obligations and failing to take appropriate legal and other professional advice on transactions in what is a heavily regulated sector.

Forbes Solicitors regularly advise charities, MATs, housing associations and other businesses on their governance and regulatory requirements; transactions and other projects; and questions on their constitution, including providing training. If you have any questions, please contact Daniel Milnes.

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