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Charities Act 2006 (Principal Regulators of Exempt Charities) Regulations 2011

Volume 729: debated on Tuesday 5 July 2011

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the Charities Act 2006 (Principal Regulators of Exempt Charities) Regulations 2011.

Relevant document: 23rd Report from the Joint Committee on Statutory Instruments.

My Lords, I shall take together this order and the Charities Act 2006 (Changes in Exempt Charities) Order 2011. The two instruments relate to the regulation as charities of three classes of state-funded educational charity: academies, sixth-form colleges, and foundation and voluntary schools.

The changes in the exempt charities order will reconfer exempt-charity status on sixth-form colleges and foundation and voluntary schools. Academies are charities and will become exempt charities from 1 August 2011 by virtue of the Academies Act 2010.

The principal regulator regulations will appoint principal regulators for all three groups of exempt charities, with the duty to promote their charity law compliance. Exempt charities have not been regulated in the same way as other charities. The general law of charity applies to exempt charities, but they are exempt from many provisions of the Charities Acts, cannot register with the Charity Commission and are exempt from its supervisory powers. The categories of exempt institutions, in so far as they are charities, are mostly set out in Schedule 2 to the Charities Act 1993.

Historically, exempt status was usually conferred by legislation on charities that were already regulated, so additional supervision by the Charity Commission was considered unnecessary. However, this was challenged in 2002 by the then Prime Minister’s Strategy Unit, which found that the position was anomalous, confusing for the public, and potentially risked the integrity of charitable status.

Most respondents to a public consultation in 2003 agreed that exempt charities benefiting from the advantages of charitable status should come under some form of regulatory oversight as charities, but concerns were expressed that duplication or new regulatory burdens should be avoided.

The Charities Act 2006 marked a new approach. Wherever possible, a body that already has oversight responsibility will become the main or “principal” regulator for an exempt charity or group of exempt charities. Principal regulators have a new duty to promote charity law compliance in the charities for which they are responsible. They have two key roles: first, providing tailored advice for their sector or signposting to relevant guidance to help trustees meet their legal obligations; and, secondly, stepping in where something goes wrong. In serious cases, it is likely that the Charity Commission will also need to be involved.

The aim of the principal regulator approach is for smarter regulation that maintains trust and confidence in charities but avoids regulatory duplication by using the regulator’s existing processes and procedures to promote charity law compliance. Where it is not possible to identify a principal regulator for a charity or group of charities, they will cease to be exempt and, if their income exceeds a £100,000 annual income threshold, will be required to register with the commission.

Although that is not the case for any of the charities we are considering today, since 2006 there has been phased implementation of this new approach. In some cases the 2006 Act itself removed exempt status from groups of charities, but it also provides the Minister for the Cabinet Office with a power in Section 11 to remove, or to confer, exempt charity status from a charity or class of charities. This power can be exercised only if the Minister is satisfied that the change is desirable in the interest of ensuring appropriate or effective charity regulation of the charities or charity concerned. In addition, the 2006 Act provides the Minister with the power in Section 13 to appoint a principal regulator for an exempt charity or class of exempt charities.

The 2006 Act increases the extent to which exempt charities are subject to the Charity Commission’s regulatory jurisdiction in Sections 12 and 14 and Schedule 5. But importantly, the Charity Commission cannot exercise its regulatory compliance powers in relation to an exempt charity without first consulting the exempt charity’s principal regulator—in Section 14 —and it cannot open a statutory inquiry into an exempt charity unless invited to do so by the principal regulator listed in Schedule 5.

I will now summarise the changes that these instruments will bring about, which were announced to Parliament in a Written Ministerial Statement on 30 March this year by the Minister for Civil Society, Nick Hurd MP, and the Under-Secretary of State for Education, the Minister responsible for schools, my noble friend Lord Hill.

Taking each of the three categories in turn, I will deal first with academies. Academies will, from 1 August this year, be exempt charities when Section 12(4) of the Academies Act 2010 is commenced. As of 1 July there were 801 academies in England. There are no academies in Wales.

During the debate on the Academies Act 2010 it was proposed that the Young People’s Learning Agency should be appointed as the principal regulator of academies. However, following the review of public bodies, the YPLA will, subject to parliamentary approval, be succeeded next year by the Education Funding Agency, an executive agency of the Department for Education. Therefore it is now considered more appropriate to appoint the Secretary of State for Education as principal regulator of academies, because he has existing funding and regulatory roles.

In practice, the YPLA and its proposed successor, the EFA, would carry out much of the necessary information gathering which would then be used to report to and advise the Secretary of State on his principal regulatory role. The principal regulator regulations therefore appoint the Secretary of State as principal regulator of academies.

The second category is what I have referred to as foundation and voluntary schools. In fact, it includes the following bodies: the governing bodies of foundation, voluntary and foundation special schools, foundation bodies established under Section 21 of the School Standards and Framework Act 1998, and connected institutions.

There are believed to be over 8,100 of these charities in England, and 175 in Wales. Historically they have been exempt charities, but in January 2009 they ceased to be exempt, although transitional provisions pending a final decision on their status have meant that they continue to be treated as if they are exempt. These transitional provisions are due to expire on 1 September, having already been extended twice.

In 2010 the Cabinet Office consulted on the proposal to reconfer exempt charity status on foundation and voluntary schools, and appoint an appropriate principal regulator. Responses strongly supported the proposal to reconfer exempt charity status, although views differed over which personal body should be appointed as principal regulator.

The Department for Education regulates these charities under education law, so is ideally placed to take on the role of principal regulator. This ensures compliance with charity law while avoiding regulatory duplication, in line with the Government’s commitment to reducing the burden of regulation on schools.

The changes in the exempt charities order reconfers exempt charity status on these foundation and voluntary school charities. The principal regulator regulations appoint the Secretary of State for Education as principal regulator of these charities in England and Welsh Ministers as principal regulator of these charities in Wales.

Following detailed analysis by the Cabinet Office, working with the Charity Commission, the Department for Education and Welsh Assembly Government, these arrangements are considered to provide the most appropriate regulatory oversight of foundation and voluntary schools as charities, while keeping the burden of regulation to a minimum.

The third and final category is sixth-form college corporations. There are currently 94 sixth-form college corporations in England and none in Wales. They were created following amendments made to the Further and Higher Education Act 1992 by the Apprenticeships, Skills, Children and Learning Act 2009. It was always intended that they would be exempt charities, as this was the status of the institutions that became sixth-form college corporations in April 2010. For this reason, the commission has not required sixth-form college corporations to register.

As with foundation and voluntary schools, the Department for Education has an existing regulatory oversight role under education law. It is ideally placed to take on the principal regulator role, promoting compliance with charity law through existing procedures without additional regulatory requirements. The Charities Act 2006 (Changes in Exempt Charities) Order confers exempt status, as was intended from the outset, and the principal regulators regulations appoint the Secretary of State for Education as their principal regulator.

I should add that we also propose to appoint the Secretary of State for Education as principal regulator of certain exempt charities connected to academies and sixth-form colleges. This will have to be done separately by a negative procedure statutory instrument, as regrettably these charities were overlooked when the instruments before us were laid.

The duty imposed by the Charities Act 2006 on principal regulators of exempt charities is forward looking. This means that they are required only to promote compliance by the charity trustees with charity law obligations arising on or after, or ongoing on, the commencement date. Principal regulators will not be required to take action relating to matters which occur before the commencement date and in connection with which no charity law obligation is continuing at that date.

The Office for Civil Society and the Charity Commission have worked closely with the Department for Education, the YPLA and the Welsh Assembly Government on these proposals, and key representative bodies of the schools and colleges have been kept informed of progress. No significant concerns have been raised about the forthcoming changes or the instruments that will give effect to them.

For exempt charities under the principal regulator regime, there will be little, if any, noticeable impact on a day-to-day basis. They will continue, as now, under their existing regulatory regime, albeit with their regulator also promoting charity law compliance.

For academies and sixth-form colleges, the YPLA will continue to have a role. The principal regulator regulations make provision for this by amending the Apprenticeships, Skills, Children and Learning Act 2009 to enable the YPLA to assist, advise or provide information to the Secretary of State for Education as principal regulator. An impact is likely to be felt only when something goes badly wrong and the regulators need to intervene.

The Charity Commission is currently developing memoranda of understanding to formalise the details of the relationship between the principal regulators and the commission. It is also setting up a committee of principal regulators which will meet annually to share best practice.

The impact of the changes made by these instruments will be reviewed within three years of commencement. Although a statutory review of the 2006 Act will begin later this year and will include an evaluation of the changes made by the Act to exempt charities, this will be too soon to properly consider the impact of the changes made by these instruments.

These instruments will ensure that academies, foundation and voluntary schools and sixth-form colleges are regulated appropriately and effectively as charities but through existing oversight mechanisms to ensure that regulation is proportionate. I therefore commend this order to the Committee.

My Lords, I am grateful to my noble friend the Minister for that introduction. I broadly welcome the regulations. I have one specific, rather gritty point to put to her. I have given notice of it to her officials, so I hope that it may be possible for an answer to be available today. I have one general point on which I would be very interested in her response and then another general point which needs to be made in the light of the regulations.

I shall deal with the gritty point as quickly as I can. It arises out of the statutory instrument dealing with principal regulators. Regulation 7 introduces a new section, Section 71A, into the Apprenticeships, Skills, Children and Learning Act 2009. New subsection (1) gives a discretion to the Young People’s Learning Agency to provide the principal regulator, the Secretary of State, with information that he or she may need in order more effectively to carry out his or her duty as regulator. We have already heard today that the YPLA is likely to be replaced in not too long a time by the education funding agency. I hope that that does not mean that we shall need further amending legislation to substitute EFA for YPLA. But why only a discretion? Surely the YPLA should be under an obligation to provide assistance, information or advice to the principal regulator, so long as it is a reasonable request. The Minister might like to comment on that.

My first general observation relates to the particular character of a government department as a principal regulator. There is growing anxiety within the charity sector about the preservation of what is an absolutely fundamental characteristic of any charity: its independence. It is often not understood among the wider public that one of the bedrock guarantors of the integrity of each and every charity—however small or large it is, whether it has trustees appointed by outsiders or not, and whether it is funded from a particular source or not—is that it has absolute independence and responsibility for its own affairs. Its trustees have one sole purpose in life, which is to forward its charitable purposes to the best of their ability for the benefit of the public.

Having the Secretary of State for Education as the principal regulator is sure to involve conflicts of interest all along the way. Whatever Government are in power, they will have their own agenda. The voluntary sector is a very important part of the provision of education generally. The measure seems to warrant a little more thought. I do not for a moment propose to question the Secretary of State for Education being principal regulator in these statutory instruments, but the concern is germane and relevant. Perhaps the Minister will take back to the Government the need for some informal, internal consideration of the independence factor, as I call it.

I move on to my final point, which I hope Members of the Committee will think relevant to our deliberations. I wish to comment on the complexity of these statutory instruments. What I am about to say will not in any way reflect upon the quality and bona fides of the civil servants responsible for these instruments, because they do their level best, and it will not reflect on the calibre of the parliamentary draftsmen. I know from long engagement with them what an impossibly difficult task they have and how superbly, on the whole, they undertake it.

The second of these instruments—the one dealing with the definition of exempt charities—makes clear in a way that is rarely visible the fact that there was a cock-up. Is one allowed to use that term in Parliament?

There was a cock-up in prior legislation that led to the need for the second of these statutory instruments to confirm that sixth-form college corporations should have exempt status re-conferred on them. There is no question or doubt that their exempt status was removed from them unintentionally. I commend whoever wrote the helpful Explanatory Memorandum on the delicate language employed therein. It explains:

“Sixth form colleges which are charities had their exempt status removed by the ASCL Act. It is unclear whether this was intentional”.

Wonderfully clear it was not. I make this point not to make fun of those who were party to the error. The parties most responsible for it were in this place, because it is we who churn out, day in and day out, tidal waves of primary and secondary legislation. It is we who fail to scrutinise adequately that tidal wave, and it is we, therefore, who did not see when the ASCL Bill was introduced that by an unintentional side wind these sixth-form college corporations were deprived of their valuable exempt status. It seems as though they have been in a sort of ghostly limbo until now, but at least we are putting them out of their misery.

I wanted to raise this issue because it is not often that such a blatant example of the weight of interlocking legislation is clearly shown to be false in its outcomes. I put it to the Committee that charity law has become barbaric. Happily, when I started practising law, nine times out of 10, such matters would never darken the doors of a lawyer’s office, but those days are long gone. We are, even in these instruments, creating another web in which to catch the unwary, forcing the prudential into seeking expensive advice and generally making the voluntary sector a victim of our excessive endeavours.

My Lords, my noble friend Lord Phillips, from his lengthy experience in the charity field, has carried most of the points with him. I shall attempt to sweep up behind a little, if I may, and raise a couple of issues. Before doing so, I need to declare interests as president of the National Council for Voluntary Organisations and as chairman of the Armed Forces Charities Advisory Company.

I wanted to speak on this issue because, first, the concept of exempt charities is complex and their structure and rationale is not immediately apparent. Secondly, these exempt charities are of course educational charities, and it is around education and health, but particularly education, that the whole issue of public benefit and charitable status revolves in the case of private schools. Therefore, it is important that we give these instruments a proper degree of scrutiny.

One danger and one problem or issue that arose during the passage of the Academies Act was whether we had undermined the issue of presumption, because the Act merely stated that these institutions would be charitable, full stop. Having spent a great deal of time earlier removing presumption and making sure that all charities had to justify their public benefit status, it seemed strange and possibly dangerous that we would suddenly say that a group of charities—in this case, schools—was exempt. Therefore, the question of how they are going to be regulated and the nature of the regulator is important.

As for when the regulator takes over from the Charity Commission, originally the 2006 draft Bill suggested that exempt charities could only disappear. Originally, the Bill as drafted allowed only for exempt charities to be removed; the original concept was that they would finally fade out. However, some of us, including my noble friend Lord Phillips and I, decided that it would be better to have a two-way valve, not a one-way valve. Indeed, it is the two-way valve that is being used to create a new category of exempt charities.

When we examined some of the exempt charity regulators, there were some surprises, which have a read-across to this debate. The regulator for universities is the Higher Education Funding Council for England. It has always been surprising that that is the regulator because it has no charitable knowledge at all; it is merely a funding body. I shall come back to that again in connection with the proposals for the regulator and the Secretary of State in the current regulation. We have had some grave disappointments. Given that we were trying to create a proportionate regime, it was a shame that the MoD was not prepared to take on some of the requirements of the exempt regulation for Armed Forces charities, because there are many hundreds of them and they require a particular light touch.

On the upside, you can have light-touch and proportionate regulation focused on a particular group of exempt charities, but there is a down side, which is regulatory arbitrage. You can find ways to fall between the cracks of the regulatory regime, which is something that we have to be very careful about. As I understand it, there will be two principal regulators. One of them is the Secretary of State for Education—that is very clear, although there are some down sides that my noble friend has just mentioned—but in the Welsh situation the regulator is a “responsible person”, which is defined in Regulation 6(2). It means a person who,

“is or was … a Welsh Minister”,

was,

“acting on behalf of the Welsh Ministers”,

or was,

“a member of a committee established by the Welsh Ministers”.

This is not an attack on the devolution process but it does mean that nobody is identified as the regulator for the Welsh educational institutions. I think that responsibility should lie with someone, or some defined body, and there is a danger here of having an amorphous and opaque nature of responsibility with regard to Welsh educational institutions.

On the question of memoranda of understanding, through which we can avoid regulatory arbitrage, I assume that there will be two—one with the English regulator, the Secretary of State, and one with the Welsh person. It will be interesting to know from my noble friend who that person will be in the light of the rather opaque drafting of the regulation. This will be the first time that we have had two regulators—one for England and one for Wales. As I look through the other exempt regulators, I see that DCMS regulates museums and galleries for both England and Wales. We are now dividing them for the first time and creating an interesting precedent.

I share the concerns that my noble friend Lord Phillips raised about role of the Secretary of State for Education in respect of England. This is a tiny part of his empire and can hardly have the attention that it might deserve. There is the issue of independence that my noble friend underlined, as well as the question of conflicts of interest that may arise in the future. I was quite attracted by the idea that the YPLA should be a regulator. If it is to be succeeded by the education funding agency, so be it. After all, if the Higher Education Funding Council is doing universities, why should the education funding agency not do this group of educational institutions? As the Explanatory Memorandum says:

“In practice, the YPLA (and its proposed successor the EFA) will carry out much of the necessary information gathering which would then be used to report to and advise the Secretary of State”?

Why not just have them carry out the role? It would be a good devolution of power. It would remove the role from the Secretary of State and avoid the conflicts of interest to which my noble friend referred.

In conclusion, I understand that these are technical questions. I am sorry that my technical e-mailing skills are not sufficient to have been able to get them to my noble friend in advance of this afternoon’s debate, but I think that they are important. In these stringent, difficult and suspicious times, we need to maintain the culture of the charity brand, especially in the field of education. Some precedents are being set here and we need to be careful that we are not doing something that we will later regret. I think that, in line with the Government’s overall policy, devolving power for regulation to the lowest possible level is appropriate, and therefore I do not quite see why the Secretary of State has to have a continuing role here. That seems to be centralising rather than devolving.

My Lords, I, too, am grateful to the Minister for introducing these orders. Of course, it is right to ensure that there is proportionate but effective oversight of charities under charity law while keeping the regulatory burden to the minimum necessary, but that regulation must be effective and ensure proper compliance with charity law. Therefore, I share the concerns of noble Lords who have spoken about the potential conflict of interest and perhaps the impact on the independence of charities if the Secretary of State is to be the regulator for so many of these institutions. I, too, think that again this is a demonstration of centralisation rather than enabling organisations to flourish, and that dismays me. I should be grateful for the Minister’s views but I also hope that the Government will reflect on potential conflicts of interest in relation to the Secretary of State’s role as regulator and his role as Secretary of State for Education.

I find no reference to free schools in the documents before us and I do not understand their status. Are they charities or not? I do not know. All academies are included. However, I do not know what the status of free schools is and I should be grateful for some clarification. If they are charities, who is the principal regulator?

In the Academies Act 2010, as the Minister said, it was agreed that a principal regulator would be required for academies and, as noble Lords have said, it was proposed that this should be the YPLA. Then along came the Public Bodies Bill and the aim to abolish the YPLA. Of course, the Bill is still in Committee in the House of Commons.

I have a few questions. First, is it not precipitate to appoint the Secretary of State for Education as the regulator when the YPLA has not yet been abolished? Like the noble Lord, Lord Hodgson, I wonder why the Education Funding Agency should not be the regulator rather than the Secretary of State. Secondly, the memoranda of understanding are clearly extremely important and I wonder whether Parliament will be able to see them before they are concluded.

My last question is a small one. The section relating to monitoring and review is a little perplexing. A review is supposed to commence later this year. However, this will be pretty worthless in relation to the regulator because the review of the 2006 Act is expected to follow shortly after the change is made by these regulations. Essentially, I am asking: why have two reviews? Why not have one review in three years’ time? That would obviate a lot of work that will go into reviewing in the mean time.

I am grateful for the extremely knowledgeable contributions of noble Lords this afternoon. I start by thanking my noble friends Lord Phillips and Lord Hodgson, and the noble Baroness, Lady Royall, for their warm welcome to these regulations. Many questions have been thrown at me; I shall try to respond to them in the order in which they were asked. I thank my noble friend Lord Phillips for prior notification of his questions. I passed his notes to the civil servants. I hope that, through my response, he will be reassured that we have taken his concerns seriously. I am pleased that my noble friend Lord Hodgson’s train arrived on time so that he was able to tease out of me further details of an extremely complex area of law.

In response to my noble friend Lord Phillips, the YPLA is fully committed to supporting the Secretary of State in his or her role as the principal regulator. The consultation went across all the agencies, all of which agreed that the Secretary of State would be ideally positioned to be the regulator. The YPLA has worked closely with the EFA, the Department for Education, the Cabinet Office and the Charity Commission on the development of the Secretary of State’s role as the principal regulator. Much of what the YPLA will do will be to support the Secretary of State as part of the existing day-to-day functions of the regulator. In practice, I am not sure that we should see the YPLA refusing any reasonable request from the Secretary of State for advice and information. I hope my noble friend is reassured that the YPLA, when it is replaced by the EFA, will continue to fulfil its role of supporting the Secretary of State.

I come to independence, on which I think my noble friend is about to challenge me.

I am grateful for what the noble Baroness said but why can the regulations not just say that the YPLA “shall” provide reasonable assistance, information and advice. Why not “shall” instead of “may”?

Since this is a legal and technical matter, perhaps I could write to my noble friend. I know that such words can change the law very quickly, and I shall not be drawn into that trap by my noble friend today.

On the issue of independence, both the Charity Commission and the Cabinet Office are satisfied that the appointment of the Secretary of State for Education and the Welsh Minister as principal regulators will not give rise to an inherent conflict of interest. The commission and the principal regulator will work together to ensure that a charity’s independence is maintained. The functioning roles already have accountability. There is no conflict, since assurance is largely derived from the funding function and both roles require similar levels of assurance.

We all accept that the law on exempt charities is an incredibly complex area with a complex history. More than anybody else in this Committee, my noble friend is aware of the difficulties that this law raises. I accept that we would rather be in a better position, but we are where we are and it is difficult to unpick some of the complexities. As a result, we should go for a simpler legal regulatory framework for exempt charities. It has always been intended for exempt charities to be exempt. When the ASCL Bill was enacted, it was agreed that this would be done through exempt-charity SIs. That is what these instruments do.

My noble friend Lord Hodgson spoke on the MOUs. Principal regulators are not expected to be experts in charity law. It is not their job to be, nor is it their duty to promote charity law unless charity law compliance requires it. Expertise in charity law lies with the Charity Commission. That is why the commission has investigation and enforcement powers in relation to exempt charities.

My noble friend also asked why the Education Funding Agency is not the regulator. As I said to my noble friend Lord Phillips, the EFA will be an agency of the Secretary of State. It will not have a separate legal personality, so it cannot be appointed as the principal regulator.

I have been told by my experts behind me that it will be shortly afterwards.

The noble Baroness, Lady Royall, reminded us of the effectiveness of the regulators. The principal regulator approach will not mean less effective regulation. It will be entirely valid to use different models of regulation to fit the circumstances so that we end up with smarter regulation that maintains trust and confidence in charities. Using an existing regulator’s processes and procedures to oversee charity compliance avoids costly and wasteful duplication.

The noble Baroness asked also about free schools. Free schools are a type of academy. They are charities in the same way as other academies. She asked also about the MOUs between the Charity Commission and principal regulators. MOUs will be published on the Charity Commission website. We are happy to deposit copies in the House Library.

I suspect that I have not given satisfactory answers to my noble friends who are experts in this area. I hope that they can be assured that I will provide written responses to questions to which they feel they have not answers.

The regulations are about making the system leaner and smarter. I therefore commend them to the House.

Motion agreed.