Charities (Regulation and Administration) (Scotland) Act – what you need to know

The Charities (Regulation and Administration) (Scotland) Act 2023 (the “2023 Act”) was passed by Parliament on 28 June 2023 and received Royal Assent on 9 August 2023. The 2023 Act makes important changes to the Charities and Trustee Investment (Scotland) Act 2005 (the “2005 Act”), the legislation under which the Office of the Scottish Charity Regulator (OSCR) was established. The 2005 Act sets out OSCR’s powers in regulating charities and the rules which govern charities and charity trustees. The changes introduced by the 2023 Act are of relevance to all charitable organisations registered with OSCR. The key provisions of the 2023 Act are not yet in force and the 2005 Act remains unchanged, for now.

Why is the law changing?

The overall aim of the 2023 Act is to strengthen and update the current legal framework for charities registered in Scotland. The current legal regime is 17 years old and there was a desire that the Scottish legislation keep pace with changes made in England, Wales and Northern Ireland.

OSCR had made suggestions to the Scottish Government to update the 2005 Act and a consultation process was carried out in 2019 and 2021. Specifically, OSCR wanted to increase transparency and accountability in charities, make improvements to its powers and bring Scottish charity law “up to date”. The provisions under the 2023 Act should also help improve efficiencies in OSCR’s operations and the charity sector more widely. It is hoped that it will enhance public trust and confidence in the sector. These are evidently very laudable aims, but there will be concerns among Scottish charities as to how OSCR may exercise its increased powers. It will also be disappointing, to some, that the focus is very much on enhancing public trust and confidence in the sector, without necessarily the same degree of emphasis on supporting the charity sector itself.

Key amendments

New requirements for OSCR to include charity trustee names in the Register, to keep an internal schedule of charity trustees’ details and to create a publicly searchable record of removed charity trustees  

Under the current legislation, the law only requires the Register to set out the principal office of the charity or (where the charity does not have such an office), the name and address of one of its trustees. The 2023 Act provides that the Register entry must include the names of all charity trustees (like the requirement which already applies in respect of charitable companies, with the details of all current and former directors being publicly available via Companies House). OSCR’s internal database will have the contact details of each trustee, while OSCR will also maintain a separate, publicly searchable record of trustees that have been removed from the management or control of any body by the Court of Session.

The aim behind these new provisions is, again, to increase transparency and accountability and to help OSCR become more efficient in respect of its compliance, inquiries and engagement work. Ultimately, charity trustees are responsible for governing a charity and as such, it would seem appropriate that OSCR knows who is accountable for the charity’s actions. Again, trustees can apply to OSCR to have their name kept off the public Register.

New criteria for disqualification of charity trustees and extending it to individuals with senior management roles

The 2005 Act lists scenarios whereby a person would automatically be disqualified from becoming, or continuing, as a charity trustee. The 2023 Act (via amendment to the 2005 Act) expands these qualifications in two ways. Firstly, it expands the range of criminal offences for which conviction results in disqualification, as well as adding descriptions of other situations which would result in disqualification. This includes, being subject to various bankruptcy measures, being found in contempt of court in England and Wales and being a designated person under terrorist asset freezing orders. The newly introduced criminal offences cover terrorism, money laundering, bribery, perverting the course of justice and a public official being derelict in their duty.

Secondly, the disqualification provisions are extended to senior management roles i.e. if an individual is disqualified from acting as a charity trustee, they would similarly be disqualified from holding an office or employment with senior management functions, within the charity.  This change gives recognition to the fact that senior managers (who are typically employees of the charity and remunerated for their services) have a pivotal role in the management of a charity – although the “buck” has always (in law) stopped with the board of charity trustees, it is the senior management team who are most closely involved in day-to-day operations.

These amendments bring Scottish charity law in line with the legislation in England and Wales. Individuals can still apply to OSCR for a waiver from disqualification.

A new power for OSCR to appoint interim trustees

This new power may trigger fears of excessive intervention by OSCR in the running of a charity, but the detail of the legislation should give some degree of comfort.  The first limb of this power applies on the request of the charity itself. But OSCR would additionally have the power to appoint interim trustees either of its own accord or on representation of any person (this latter part being something we could see being of particular use to frustrated senior management teams who feel that there is not a functioning board, with trustees failing to attend meetings etc). OSCR’s power to add interim trustees would apply where (a) the charity has no existing charity trustees (b) all of the charity’s existing charity trustees either cannot be found or aren’t acting and are not expected to resume acting, or (c) the number of the charity’s existing charity trustees are such they are unable to make a request for the appointment of additional trustees.

A new requirement for OSCR to publish the statements of account for all charities in the Scottish Charity Register

All charities in Scotland are already under a legal duty to prepare annual statements of account, and to have these independently examined or audited, before submitting the statements to OSCR. There is, under the 2023 Act, a requirement for OSCR to publish these, in an effort to increase transparency and accountability in the sector. Charities and charity trustees will be able to apply to OSCR to withhold certain information (e.g. the names of any charity trustees) from being included in the Scottish Charity Register (the “Register”), where this may jeopardise their safety or security.

New power to remove, from the Register, unresponsive charities that fail to submit statements of account

Where a charity has failed to send a copy of its statement of account to OSCR, within the relevant timescales, and the charity has not responded to communications from OSCR in respect of the failure (and no statement is being prepared by a suitably qualified person appointed by OSCR further to the failure to submit), OSCR may give the charity notice of its intention to remove the charity from the Register. There is, however, a grace period – the charity can contact OSCR within three months of the date of the notice. This will be of particular relevance to Scottish charitable incorporated organisations (SCIOs) as the removal power will constitute the power to dissolve a SCIO (given its charitable status is an intrinsic part of its existence).

The creation of a record of charity mergers providing for the transfer of legacies

Charities may sometimes be granted legacies in wills. If the will has been prepared well, it will provide that if a charity winds up in favour of another charity, then the legacy is to go to the successor charity. If this hasn’t been included, legacies can sometimes have to be distributed according to succession law, instead of going to the charitable sector as intended. This is because, in Scotland, where a charity changes its legal form or merges with another charity, the original charity ceases to exist and a new charity is created – as such, the proposed beneficiary no longer exists.

The potential loss of legacies can be a significant concern for charities. To avoid the situation of losing legacies, when one charity merges with another, a ‘shell’ charity is often kept in existence to receive and pass on any legacies which might otherwise be lost. This creates additional burdens for both the charity and OSCR, and so the 2023 Act seeks to avoid this by establishing a record of charity mergers. Where a merger is recorded, the new charity will be entitled to a legacy bequeathed in a will to the old charity without any further step being required, unless it is clear from the terms of the will that the testator intended otherwise.

In the 2023 Act, the term “merger” includes the situation where two or more charities wind up in favour of a newly established charity, as well as situations which might be considered as “takeovers”.

An extended power for OSCR to conduct inquiries into former charities and their charity trustees etc

Under the 2005 Act, former charity trustees can generally-speaking walk away from a charity without any concern – but under the proposals, former trustees can be investigated by OSCR (and suffer the same consequences as existing charity trustees). The same applies to former charities. And this would seem to be an appropriate approach. We have seen instances where charity trustees resign when the going gets tough, leaving a small group to pick up the pieces – these new provisions would mean that resignation would not necessarily amount to an escape route.

A new power for OSCR to issue positive directions to charities (section 15)

As part of OSCR’s role as regulator, it has the power under the 2005 Act to investigate concerns and conduct inquiries into charities. Under the 2005 Act, there are various orders which OSCR can make to a charity following an inquiry, but these are almost exclusively directions that something is not to be done. The 2023 Act introduces a new power for OSCR to make positive directions, such as directing a charity to remove a charity trustee, or to appoint an additional trustee, or to ensure a conflict of interest situation is properly managed.

The aim of this provision is, therefore, to strengthen OSCR’s investigation and enforcement powers. The new power may only be used where OSCR considers there to have been misconduct or where it is necessary/desirable for the purpose of protecting charity assets. The use of the power will also be subject to OSCR’s existing duties to act proportionately, accountably, consistently, transparently and targeted only at cases where action is necessary. It is very much a case of waiting to see how this power is implemented in practice. In terms of its current powers (and not withstanding that OSCR is a very active regulator) we don’t consider that it has generally taken action other than in a proportionate manner. If anything, at times, it has taken an arguably softer line than one might expect.

A new requirement for all charities in the Register to have and retain a connection to Scotland (section 16)

Under the current law, an organisation which wants to represent itself as a charity in Scotland must register with OSCR (unless exceptions apply) – there is no current requirement for a charity to have a particular link with Scotland (other than in the case of SCIOs). Under the new law, OSCR must reject an applicant to the Register where OSCR considers it would not be appropriate for it to regulate the applicant because the applicant has or will have no, or only negligible, connection to Scotland.

Further, if OSCR considers that a charity already in the Register no longer has a connection to Scotland, and it would be inappropriate for OSCR to continue regulating it, OSCR must direct that charity to establish a link to Scotland. If it does not, OSCR must remove it from the Register.

The aim behind this provision is to address the concern that OSCR cannot effectively regulate those charities which have no connection or only a negligible connection to Scotland. It is not designed to prevent the registration of cross-border charities or to preclude Scottish charities operating for the benefit of those out with Scotland.

A requirement for de-registered charities’ assets to continue to be used to provide public benefit (schedule, para.7)

Under the 2023 Act, a body removed from the Register (under section 18 of the 2005 Act or otherwise) will continue to be under a duty to apply its protected charitable assets in accordance with its charitable purposes as set out in its entry in the Register immediately before its removal and to provide public benefit in Scotland or elsewhere. The effect of this is that removal of charitable status does not give an organisation carte blanche to use its assets as it sees fit – any assets accrued during its time as a charity (or income accruing therefrom) must effectively continue to be treated as such.

What’s missing?

One key change, which a number of charity solicitors had pushed for and which is absent, would be to have a legislative regime allowing for a more straightforward conversion of unincorporated charities to SCIOs (which would then provide the benefits of limited liability). At present, the process of conversion can be onerous and costly (e.g. if the charity has any leases, contracts etc, these all need to be assigned). This is quite different from the position for incorporated charities (such as charitable companies) which can convert with ease to SCIOs (without the need for formal transfers of leases, contracts etc as this is all catered for under statute with all assets etc automatically vesting in the SCIO following its incorporation). Those managing unincorporated charities are exposed to the greatest potential liability (there is no separate legal entity in place and no limited liability protection, therefore management committee members can have personal liability for the liabilities of the charity). Unincorporated charities are the very ones who would benefit most from conversion to a SCIO and yet they’re subject to a cumbersome and potentially costly process.

We would also have welcomed changes to the duty on members of SCIOs to act in the interests of the charity (a duty which is, generally-speaking, reserved to the trustees in all other charitable legal forms) – this seems to be an anomaly.

Finally, there may have been merit in including a legal obligation on charities to report notifiable events to OSCR – at present, this is done on a voluntary basis and we have had reports from charities who have made such reports feeling dissatisfied with the response from OSCR, which may result in fewer reports. Putting this on a statutory footing would clarify the obligations on charities, albeit there may be a job to do in managing expectations as to how OSCR respond to such notifications.

What happens next?

Most provisions of the 2023 Act will come into effect when the Scottish Ministers make regulations for this. We are hopeful that the new 2023 Act will not be the end of the story for Scottish charities – The Social Justice and Social Security Committee (which led the on the bill), in its report of 28 April 2023, noted that they did “receive a significant amount of evidence that highlighted other suggested areas of charity law that could be reviewed in the future or where there are perceived ‘gaps’ in the 2005 Act more generally. In many cases, respondents accepted that these suggestions could be taken forward as part of the future wider review of charity law the Scottish Government has committed to. We also note the Scottish Government states in its Policy Memorandum that it doesn’t seek to revisit the fundamental principles of the 2005 Act with this Bill”. Watch this space.

If you have any concerns or queries in respect of the 2023 Act, or any aspect of charities law, please get in touch with a member of our Charities Team.