Oral evidence: Fundraising in the charitable sector, HC 431Tuesday 3 November 2015

Oral evidence, 3 November 2015.

Witnesses

Rob Wilson MP, Minister for Civil Society, William Shawcross, Chairman, Charity Commission, and Michelle Russell, Director of Investigations, Monitoring and Enforcement, Charity Commission, gave evidence.

Chair

Welcome to our second panel of witnesses. I must apologise that we are in this vast room and you are very far away, but if you shout loud enough we will hear you. Could I ask each of you to identify yourselves for the record, please?

Mr Wilson

I am Rob Wilson. I am the Minister for Civil Society.

William Shawcross

I am William Shawcross. I am Chairman of the Charity Commission.

Michelle Russell

I am Michelle Russell. I am the Director of Investigations, Monitoring and Enforcement at the Charity Commission.

Chair

Thank you to the three of you. We will ask short, concise and open questions, I hope, and if you could reciprocate with short and concise answers it would assist us greatly. May I particularly welcome the Minister? I think it is his first appearance in front of this Committee—the first of many I hope.

Kate Hoey

Welcome. Lord Hodgson has said that the Cabinet Office should convene a group, including the main regulators of fundraising, to continually review the regulation of fundraising. Has this group met?

Mr Wilson

Could I start by saying—

Kate Hoey

No. I would just like you to start by saying yes or no.

Mr Wilson

We have had a meeting already with large charities in the NCVO and a number of other organisations represented. We are making rapid progress. I hope to be able to announce the new chairman of the regulatory body imminently. We are making rapid progress. There is a working group ready to be set up to look at some of the issues. You have to remember we have only really been at this for a month.

Kate Hoey

2012. I appreciate you may only have been at it a month, but it has been a long time since Lord Hodgson made the suggestion to the Cabinet Office.

Mr Wilson

Yes. When I became the Minister a year ago, one of the first things I recognised was that the self-regulatory system was not working, and one of the things I was looking at was setting up a review of the system because clearly something needed to change. I was very aware that there were systemic problems, for example, between the Standards Board and how it was working, how it was interfacing with, for example, the Institute of Fundraising. There were clearly systemic problems that the Standards Board had lost the trust of the sector to a large extent, and a number of large charities were not signing up to the Standards Board, so there were clearly problems. I did talk to Lord Hodgson about doing a review, but unfortunately he was already committed to doing another review on the lobbying and transparency legislation that we put in. Then the Olive Cooke issue blew up and that needed a very rapid and urgent response because it raised issues that we had not previously been aware of, although—

Kate Hoey

I think the answer is yes.

Chair

We will move on, because you are giving one of those long answers. Just a minute.

Kate Hoey

The answer is you have not done an awful lot so far.

Chair

Just to be clear, there was a recommendation from Lord Hodgson in 2012 that the Cabinet Office should convene a group, including main regulators of fundraising, to continually review the regulation of fundraising. When did that group first meet?

Mr Wilson

As I have indicated, Mr Chairman, I have taken a number of actions. I have been on top of this issue from the moment I was appointed.

Chair

Just say you do not know.

Mr Wilson

I am just telling you the answer.

Chair

The answer is you should be able to give us a date of when it first met.

Mr Wilson

What I can tell you is that we have made amendments to the Charities (Protection and Social Investment) Bill in response to—

Chair

No, that is not the question. I am sorry.

Mr Wilson

What I am telling you is that we have taken a considerable amount of action in a very short space of time in responding to this issue.

Chair

The suggestion is, unless you want to correct this in writing afterwards, this group never met until this crisis blew up. Is that correct?

Mr Wilson

I have given you my answer, Mr Chairman, in that we have taken a considerable amount of action.

Kate Hoey

That is very helpful. There is no harm in admitting that it has not met. That is fair enough. It is not fair enough, but there is no harm in admitting it. Can we take it that we or you owe a great vote of thanks really to the Daily Mail for bringing out a lot of these allegations and the Etherington Review, and that until that happened the Cabinet Office really did not take these things seriously?

Mr Wilson

Can I just say that the group did meet in 2013, which was obviously before my time in the Cabinet Office? We can write to you with further details of that.

Kate Hoey

Yes. It would be useful to know what it discussed and what came out of that meeting.

Mr Wilson

Yes. As I say, I was aware of systemic problems in the way that the self-regulatory system was working.

Kate Hoey

My question is: is it now being taken more seriously, only since these allegations came out in the Daily Mail?

Mr Wilson

As I have said to you, it was taken seriously from the moment I got into the Cabinet Office and took on this job. What we did not know was the extent of the unethical practices taking place in the mass-marketing area of the telephone preferences and the direct mailing. I was not aware, and I do not believe my officials were aware, of the scale of what was going on, and that was the thing that the Olive Cooke incident brought to life. It suddenly flushed out, along with a number of investigative journalism-based articles, the extent of these poor practices and the fact that many of them were quite immoral.

Kate Hoey

It worried you quite a lot, did it?

Mr Wilson

It worried me immensely, and within a week of hearing about the Olive Cooke story I called the regulators in to see me and told them that they had basically one month to start to put things right—to introduce new measures so that they could start to rebuild confidence with the public.

Kate Hoey

Thank you.

Oliver Dowden

One of Lord Hodgson’s recommendations was that the Charity Commission works closely with the FRSB. How did the commission put that into practice?

William Shawcross

We have been working closely with the FRSB and the other two regulators of the charitable sector always, and we have worked with the Cabinet Office also. I should say the Minister and I have talked about these issues ever since he came into office, and our relationship with the Cabinet Office has been very helpful. It was made clear in the 2006 Act, in the 2011 Act and in Lord Hodgson’s review that the best system was for charities to self-regulate and it should not be a statutory duty of the Charity Commission. We have abided by that, obviously, and we have had a watching brief, but our job has not been to regulate charity fundraising. Since the horror stories of the summer, which Ms Hoey quite rightly accredited to the Daily Mail and The Mail on Sunday—they did the charity world a great service in exposing these misdeeds by some, not all, charities. One must emphasise that only some charities have behaved badly. The vast majority of charities in this country, of which there are 160,000, behave well, and we must not tar them all with one brush in this context. Since then, as you know, the Cabinet Office immediately set up the Etherington Review. We have worked closely on and spoken to Sir Stuart and his review team, and we welcome very much the new, stronger self-regulating body that Sir Stuart has recommended and the Cabinet Office has accepted, and we will work closely with that body as it envisages.

Oliver Dowden

May I just press you a little further on exactly how the Charity Commission worked with the FRSB prior to these allegations being exposed by the Daily Mail?

William Shawcross

Michelle, may I ask you to answer?

Michelle Russell

I suppose there are three areas in which you can umbrella our work and support with them. The first is by making clear in our public guidance about trustee duties, and that guidance is CC20 on fundraising to make that plank clear and to signpost to the public and to trustees the role of the three regulatory bodies that exist. The second area is that we have a memorandum of understanding with FRSB, which makes clear what types of cases we would be interested in and have legal remit to take. The third area is supporting them in a more general sense. If I can give you a specific example of that, we supported them in an initiative around public supermarket fundraising collections to give the public more confidence that charities that approach supermarkets for permission to collect in their premises are only those that file their accounts on time and, on the face of it, have good financial management.

Oliver Dowden

How did you feel that relationship worked prior to these allegations coming to light between the Charity Commission and the FRSB?

Michelle Russell

I suppose there are some things that work well and perhaps some things that you always think we could do better or do more of. FRSB is a small organisation with a small number of employees, and it had a limited membership body. We were only ever going to reach a small number of charities through FRSB, so it was important for us as well to make sure that we had a relationship with the other two bodies that have a role to play in the current self-regulatory remit.

Oliver Dowden

May I ask both William Shawcross and the Minister what your reaction was to these allegations? You have touched on it a little bit already, but what was your reaction when you first saw them in the Daily Mail?

William Shawcross

In the summer?

Oliver Dowden

Yes, in the summer.

William Shawcross

It was horrific, obviously. It was an appalling abuse of charity and the whole nature of charitable purpose. As I said, I am very glad that the Mail and other newspapers exposed it, and we are here because of that today. I think the Minister and the charity sector have responded properly in coming up with a new, much stronger self-regulatory system, which we are pledged to support.

Oliver Dowden

Was it one of complete surprise, or did you have any underlying concerns?

William Shawcross

After the Olive Cooke tragedy, it was not a complete surprise, because that had shown that something was wrong. Apart from that, yes, it was a surprise. Sorry, I would like to stress again that not all charities and not all fundraising charities have behaved in this way, and there are a lot of wonderful charities out there that should not be all put in the same basket.

Oliver Dowden

Thank you.

Mr Wilson

My immediate reaction was that this was unethical, immoral behaviour and, on further investigation and reading the stories, it was quite clear that these poor practices were systemic and that large charities were ducking the usual rules of best practice, or even good practice for that matter, and there was a certain amount of what I would call manipulation of vulnerable and elderly people in what they were doing. It should always be stressed that it is in the context of many charities doing wonderful work and fundraising quite properly, but there were these errant organisations, who were not adhering to the rules, who were doing things particularly badly.

Oliver Dowden

Thank you.

Mrs Gillan

Can I get the timelines clear in my mind? Minister, when were you first aware of the public discontent with the fundraising? Was it before the Daily Mail articles or was it with the Daily Mail article?

Mr Wilson

I would say that I first became aware of the seriousness of the bombarding of elderly, vulnerable people with both telephone and direct mail, these mass-marketing techniques, with Olive Cooke. I was aware of problems with the systemic structure of self-regulation before that, but really Olive Cooke was the first sign of that, and within a week of that I had the self-regulators in to see me, to tell them they needed to take very urgent action.

Mrs Gillan

It effectively took the Daily Mail reports to allow this to sink into your consciousness and to create the Etherington Review?

Mr Wilson

No, because, as I say, immediately I had already taken action with the self-regulators within a week of the Olive Cooke story coming out. The Daily Mail articles came out after. Firstly, I think it was The Mail on Sunday.

Mrs Gillan

When did you set up the Etherington Review? After the Daily Mail articles?

Mr Wilson

That was after what I deemed to be a failure of the self-regulators to react in a sufficiently robust way. I gave them until the end of June to do that, and at that point I did not feel that they had done enough and that more needed to happen, and that is when I decided that I would set up a review.

Mrs Gillan

You set up the Etherington Review after the Daily Mail revelations.

Mr Wilson

Yes.

Mrs Gillan

Then how did you view the conflict of interest in appointing the leader of the sector’s representative body to run that review?

Mr Wilson

I did not see it as a conflict of interest because I saw that what we were doing was setting up Sir Stuart to lead the review, but he also had three Members from the other House that were involved: a Liberal Democrat, a Labour Member and also a Conservative Member. I felt the best way to do this was on a non-party basis, but I also felt that the charity sector had caused itself so much damage with the revelations that we had seen that it should have the opportunity to try to put this right. I think that many people accept that the Etherington Review is a very good review and makes some very good suggestions about how we proceed in the future.

Mrs Gillan

It is effectively taking someone from that area to carry out the review of the area. What consideration did you give in the Department to a potential conflict of interest?

Mr Wilson

We have to take all these things into account, and it was one of the things that was considered as part of that. I felt that it was appropriate. He had a very strong track record of making good decisions about the sector and I think he had a lot of knowledge. When you are doing a quick review, it is very difficult to get up to speed quickly with some of the issues, and I felt that he would be there quicker than other people. It is very important to stress that we needed to make sure that this happened quickly because there were many practices that we needed to put a stop to very quickly. Having a review that was able to deliver some very solid recommendations quickly, that had consulted the sector, was very important.

Mrs Gillan

Mr Shawcross, may I ask you the same question? When were you first aware of the public discontent with fundraising? Was it really triggered by the Daily Mail?

William Shawcross

Yes. With the Olive Cooke death, the tragic death of Olive Cooke. Then of course the Mail investigation compounded that. May I add, Madam, a word about Sir Stuart Etherington?

Mrs Gillan

No. I just want to continue on this line. I just want to know why it took the Olive Cooke incident to alert you to all of this, for example, when we had the substantial polling evidence from things like Ofcom.

William Shawcross

I did not hear that.

Mrs Gillan

It obviously took the Daily Mail revelations for the Charity Commission to be alerted and even for the Minister to be alerted to what was going on in this sector, and to realise that it was much bigger than was anticipated. I just wondered if you were unaware of the substantial polling information and evidence that came from organisations such as Ofcom.

William Shawcross

Everybody was taken aback by first the death of Olive Cooke and then by the extraordinary revelations in the Daily Mail, and everyone was taken by surprise and was shocked by that. It is not, as I have said before, our job to control and to regulate fundraising of charities. That was decided by Parliament in the 2006 Act and in the 2011 Act, and again by Lord Hodgson, that self-regulation was the answer for fundraising, and we have abided by that ruling of Parliament. If Parliament ever decided to give us the job of regulating charities’ fundraising, which I hope they will not, of course we will fulfil it properly. But so far they have not done so. I very much welcome, as I say, the prompt way in which the Cabinet Office set up the Stuart Etherington Review. If I may say so, he was a very good choice. He is a great critic of the Charity Commission. He is not a great friend of ours all the time but he is an objective and fair-minded man, and I think he was a good person to lead this review and to do it quickly.

Mrs Gillan

Basically, what you are telling the Committee is that the Charity Commission is prevented by the charity laws that exist from bearing any responsibility or having any oversight into the fundraising activities of charities. Is that what you are saying?

William Shawcross

We all carry responsibility for everything, Madam, but we do not have any regulatory oversight. That is correct. Michelle, do you want to add to this?

Mrs Gillan

So you don’t think that what has been happening in the charity sector is a failure of oversight of the Charity Commission?

William Shawcross

No, I don’t.

Mrs Gillan

Ms Russell?

Michelle Russell

There are two different things here, I think. The first thing I would just say is that the research that we commissioned into what affects public trust and confidence, and we publish each year, does highlight that fundraising practices do affect public trust and confidence in charities generally. We have been very clear for a number of years that that is an issue that the sector needs to be aware of. There are two different responsibilities here. The Commission is responsible for regulating abuse and misconduct and mismanagement. Where there are practices that are illegal or amount to misconduct or mismanagement in a charity, that is where the commission’s engagement kicks in. What we have seen over the summer is not necessarily illegal practices—although of course there is the Information Commissioner’s Office, which is investigating whether or not there have been Data Protection Act breaches—but that the methods and practices of fundraising, which are self-regulated, while they may not be illegal, are uncomfortable to the public, and that is what has been brought to the forefront this summer.

Mrs Gillan

Do you not therefore think, Ms Russell, that it is hard for somebody looking at this from the outside to see you set up as the Charity Commission, to have you looking into fundraising practices by your own admission, but then not taking any responsibility whatsoever for bringing charities up to speed on this?

Michelle Russell

First of all, there is a legal remit issue. For example, we have no jurisdiction over fundraising companies. Our jurisdiction is in relation to charities and the charitable funds that they hold. We can hold charities to account for not having with a professional fundraiser the appropriate agreement or the appropriate clauses in place, and we do have cases that are related to that. But the methodologies and practices of perhaps oppressive or aggressive or repetitive asking for money from donors—that is where Parliament has decided that it is self-regulatory. We are there if there is a persistent breach or it leads to a significant risk to assets to take action, and that is where we have done that.

Mrs Gillan

Do you have no responsibility whatsoever, because you say Parliament has decided you have no responsibility whatsoever, to report those matters, say, to the Cabinet Office or draw the attention of the Minister responsible for this area to those practices that you are not able to influence but you are obviously aware of? From what you have both been saying, you were obviously aware that there was a lot going on in this area, but it was not your responsibility.

Michelle Russell

On the misconduct and mismanagement, we publish every year what we are finding on fundraising practices in our annual report and in our compliance report, “Tackling abuse and mismanagement”. It is highlighted as one of the themes that we report on there, but there is a difference between the illegal practices and areas where trustees have fallen down on their legal responsibilities, which is our area of responsibility, and those that are not illegal but uncomfortable fundraising practices—as William has said, the first time that it unfolded about how serious that was is when it was exposed over the summer.

Oliver Dowden

William Shawcross, may I ask a further supplementary question on this? I completely accept the point you are making about Parliament not giving you responsibility for this and it being done on a voluntary basis. Do you think there is a lack of clarity, though, in the public’s mind, or was there a lack of clarity in the public mind that this was not the responsibility of the Charity Commission? Certainly the evidence we received previously from Sir Stuart Etherington was that, for example, in relation to the Advertising Standards Agency, everyone knew that was responsible for advertising. Do you think there was a bit of a presumption that the Charity Commission was responsible for this just because you were called the Charity Commission?

William Shawcross

I am sure you are right.

Oliver Dowden

Admirably succinct. Thank you.

Chair

The frustrating thing about this is that virtually every witness we have had in front of this Committee has said, “Oh, well, we didn’t know. Oh, this has all come as a terrible shock.” Ultimately, the way trustees have been blind to this surely does fall under the remit of your regulatory role. What do you say about the way trustees have clearly failed in the high duties you set out for them on your website and in your publications?

Mr Wilson

Can I just say, interrupting briefly, Mr Chairman, that it is not entirely true that all the other witnesses have said they didn’t know, because I think the Information Commissioner said that he was already investigating a number of large charities for breaches of the Telephone Preference Service. So, clearly, the Information Commissioner did know this was going on and had admonished, I think, the Institute of Fundraising for trying to—I think he described it—”wriggle out of the rules”.

Chair

I accept your correction, but I am saying “everyone” in the general vernacular sense rather than in the mathematical sense. I think the Chairman of the Charity Commission gets me drift that not a lot of people are taking responsibility for what has happened, and it is not a question of trying to find people to point the finger of blame at, but what do we learn from that about the governance of charities and what should we learn about the governance of charities?

William Shawcross

What we have learned about the governance of charities is what you know better than I do, Mr Chairman—that the governance of charities does not depend on anyone except the trustees. Trustees are utterly responsible for the governance of their charities. It is not the Charity Commission that runs 160,000 charities; it is the 1 million trustees of those 160,000 charities who are responsible for them. Most of those trustees do a very, very good job. We do not want to discourage people from becoming trustees because we do not want to diminish the world of charity, which is a crucial part of British society. We tread a fine line by having to tell trustees what their responsibilities are and yet not discouraging people and making it sound so onerous that no one wants to become a trustee. In the last resort, you are absolutely right: it is for trustees, and it is the trustees who are responsible for employing fundraising organisations that use extremely dubious methods.

Chair

What action do you take as the Charity Commission in respect to trustees who have just said, “Oh, we didn’t know”?

William Shawcross

We do need to have a complaint about a charity. We do need to have reason to go into a particular charity. If we had a complaint about a charity’s fundraising practices, we would have referred it to the FRSB. Under the new system that is being proposed by the Minister and by Sir Stuart Etherington, we will have a much bigger role—a backstop role. We will not be on the forefront of it, but we will be much more involved in the system. Do you want to add to that, Michelle?

Chair

No, no. We will go on to the Etherington Review outcome.

Paul Flynn

We are used, I believe, to seeing Government marching their troops up to the top of the hill and then, a few years later, marching them down again. This disillusionment with self-regulation, is it part of a Pauline conversion by Government, who once thought that self-regulation was a panacea? Is it not, too, that generally self-regulation means that institutes act in their own interests and not in the interests of the public?

Mr Wilson

I did not catch all that, but I still believe that a self-regulatory system can work. I inherited a system that was much criticised and, as I have already told the Committee, I felt needed to be reformed. I am a Conservative. My instinct is not to regulate. My instinct is for sectors and bodies to sort out their own problems. That said, clearly the self-regulatory system that existed has not worked for some time and indeed—in answer to the Chair’s previous question—it made it such that accountability within the system was almost impossible because there were too many overlaps and conflicts between the three main organisations that were involved in self-regulation.

Paul Flynn

We will forgive you your instincts, but they have been changed by experience, we understand. Are the people who are now saying that self-regulation is a bad thing and has not worked, has been damaging, the same people who were telling us a few years ago that we had to go on towards self-regulation in all areas? Is that not true?

Mr Wilson

No. Self-regulation, as it was set up, was criticised in 2012 by Lord Hodgson. As I have said, when I started this job a year ago, it was something that I saw immediately. It does not mean that self-regulation cannot work. There are many areas in life where self-regulation does work, and I believe that self-regulation can work as long as the sector gets behind the Etherington Report and the recommendations in it, certainly moves to an opt-in system, supports the Fundraising Preference Service and supports the new fundraising body. If it does that, self-regulation can work. If it does not, we have the backup in that we are going to make some further amendments to the Charities (Protection and Social Investment) Bill to make sure that we can move it to a statutory basis if it fails, because we cannot have the situation that we have had going on indefinitely.

Paul Flynn

But you have been continued on this mantra of deregulation for a long time now. Would you not have the grace to admit that regulation would have prevented the problems that we are now discussing, and that resulted from self-regulation?

Mr Wilson

A different form of self-regulation might have worked just as well, but unfortunately nobody took that action in a timely manner.

William Shawcross

Mr Flynn, your questions are really important. It seems to me that one of the functions of the whole charitable world is to soften the state. William Beveridge is a great hero of mine and possibly of yours, Sir.

Paul Flynn

Of mine, yes.

William Shawcross

He said, “The making of a good society depends not on the state but on citizens acting individually or in free association with one another”. I think that is absolutely correct, and that is what charities do extremely well. It is only, as I said before, a minority of charities that have been seen to behave badly in their fundraising practices, and I think it would be a terrible backward step if statutory regulation were imposed on all the million trustees who do a wonderful job, just because of the poor behaviour of a minority of big charities. My job at the Charity Commission is to protect all charities, big and small, and I do not want all charities to be encumbered with regulation that is not necessary. That is why I support what Sir Stuart Etherington has produced for the Minister.

Paul Flynn

I do not recall; did you oppose the Lobbying Bill that gave a kicking to charities quite unnecessarily?

William Shawcross

We thought that the Lobbying Bill would not have a great effect on charities, and I believe we were correct.

Paul Flynn

Anyway, this is the current mood of the country, I am afraid, and I think we have to look in the future, all of us, to how we put right the great damage that is going to be done to charities by Kids Company, by the abuse of the fundraising and so on. There is a real, serious threat in the future that these scandals will undermine the public’s faith in charities. Could you explain to me who is responsible for the system of regulation for fundraising now, and how it will be altered if the Etherington Report proposals are implemented?

Mr Wilson

The current system, as you probably know, is a tripartite system between three organisations taking different bits. The problem with the current system is that it is very confused—overlapping. You have a representative body, so a membership body effectively controlling the code of conduct for best practice for the whole sector. On that, as we have discussed, Lord Hodgson made some recommendations back in 2012. The Etherington Review changes it to a single fundraising regulatory body that will have a certain number of powers that end up with, as a backstop, the Charity Commission intervening if the problems are particularly severe or particularly difficult. It is a much more focused operation, which people will understand. It will have clear powers. It will have clarity in a way that the old system did not have. It will also have two other important things. One is the Fundraising Preference Service, which is a reset button for anybody who is worried about the amount of direct mail or telephone calls that they are getting. They can come off all lists by registering with it. The other is a move towards opting in to any information that people are going to receive from charities. There must be a clear expression that somebody wants to receive the information before they get it, and that is something the Information Commissioner has confirmed is best practice in the industry.

Paul Flynn

We have had evidence that for some charities that deal with more than £1 million, only a small amount of that money has come from fundraising. Would this be a superfluous regulatory burden on them?

Mr Wilson

I think that a working group is going to be established very shortly to look at how this will work, and that is something for the chairman of the new fundraising regulator to look at alongside the working group.

Paul Flynn

The Information Commissioner has suggested that his guidance on direct marketing should be laid before Parliament by the Government and the new regulator should have to have high regard for this. What is your reaction to this idea?

Mr Wilson

We want to work with the Information Commissioner to make sure that we come up with a regulatory system that he is happy with, that the Charity Commission is happy with, that is robust and makes sure that vulnerable and elderly people are always protected.

Paul Flynn

Mr Shawcross, we know the Government have cut your funding savagely. How much of an extra burden have you had or do you expect to have with these new regulations coming in? Is it something that the commission can undertake successfully?

William Shawcross

You are quite right that our funding has been cut, and it is a serious issue for us, from £40 million to £21 million in the last five years. We have had to address this problem, and one of the ways in which we have addressed it is that I brought in a new chief executive to start a transformation programme of the commission to make it more effective and more efficient. We are one year into that, and I hope that, as a result of it, we will come out with a Commission that is better at regulating without such costs as we have had to employ up until now. In answer to your question, we have said that we will second someone to the transitory stage for the next six months of this new Commission, this new self-regulatory body, and we will assist them in whatever way we can. We would not expect masses of cases to be flung in our direction because I hope that the new body will be able to sort out most of the cases that they have themselves. Nor would we expect no cases to come to us. We will expect a few, and if it becomes incredibly costly then we will have to come to the Minister and ask his advice. You are right, and I am very glad you mentioned that the Charity Commission does not have enough money. We don’t. I know times are hard for everybody so I am not whinging particularly, but it is quite difficult for us to do our job as well as we would like to.

Paul Flynn

The advice that you provide the Minister will obviously include a request for extra funding, I presume, will it?

William Shawcross

I make those requests usually to the Treasury, Sir.

Paul Flynn

Bonne chance!

Mrs Gillan

How many people work for the Charity Commission?

William Shawcross

300 approximately. 294 or something. About 300.

Chair

That is down from?

William Shawcross

How much was it?

Michelle Russell

It used to be 600.

William Shawcross

Yes, long before I was there. 10 years ago it was 600. I should say, on the question of funding, we were very lucky last year. The Treasury gave us an extra £8 million of one-off expenditure to modernise our systems and to make ourselves even fitter for purpose than we are already. I want to acknowledge with gratitude the Treasury’s one-off endowment to us.

Chair

What discussions are you having with the Government about how the Charity Commission might be funded in the future?

William Shawcross

That is a huge question; I imagine, Sir, you may wish to call us before you discuss it another time. It is my view that for the Charity Commission to be able to continue for the next 10 or 20 years as an effective regulator we need to seek other sources of funding than the taxpayer. We cannot go to the Treasury every year and ask for more taxpayer money—times are too hard for that. I am exploring already with the charitable sector the possibility of charities funding at least part of the Charity Commission. Our budget is £20 million a year approximately, and if we were cut down by salami-slicing of financial reviews year by year to £15 million over the next five years, we wouldn’t be able to do the job at all. I think it is time for the charity sector itself to understand that there are advantages for them in funding their own regulator, as happens in many other sectors. That is something that I would love to consult with your Committee on, perhaps early in the New Year, because I think it is a matter of urgency.

Chair

Thank you for the heads-up.

Mr David Jones

Minister, we have heard from the NCVO that this is the last chance for self-regulation to work. Would you agree with that?

Mr Wilson

Yes, I would, and I have been pretty clear to everybody I have spoken to, both privately and publicly, that this is absolutely the last chance. That is why I am putting further measures into the Charities (Protection and Social Investment) Bill so that it is absolutely clear that if we have to regulate, we will regulate, and we will turn the matter over to the Charity Commission to deal with.

Mr David Jones

How will you assess if self-regulation has actually worked?

Mr Wilson

We firstly need to give it a fair period of time to operate and we need to see how the large charities react, whether they fund it properly, whether they support it properly, whether they support all the recommendations of the Etherington Review in full. Then there needs to be a period of operation, and I think that there should be a review, probably after a year of operation, to look at all the detail of how it is working and what sorts of problems have been referred to the Information Commissioner, to the Charity Commission, and make a decision at that point. We are proposing that this Committee sees the chairman and chief executive on a reasonably regular basis, and I would expect this Committee to ask those sorts of questions as well.

Mr David Jones

To what extent will we still be relying upon investigative journalists from newspapers like the Daily Mail to tell us about abuses of the fundraising system in this country?

Mr Wilson

I welcome the fact that there are great journalists out there who are exposing very serious concerns, public interest concerns, both to the public and to Government, and I hope that continues long into the future. I congratulate The Mail on Sunday and the Daily Mail for the great work that they have done.

Mr David Jones

Shouldn’t the new self-regulatory system obviate the need for journalists to do that sort of work?

Mr Wilson

That is what we hope will happen. That is what I hope will happen. I hope that the new self-regulator will make a real difference and change what has been going on in the sector. The difficult thing is changing a culture that has clearly developed among some large charities. Somebody said to me the other day that they were turning a blind eye to some of the practices that were going on. We need to make sure that the culture in the sector changes alongside the enforcement and regulation that we are proposing to implement.

Mr David Jones

Etherington suggests that this Committee should hold the new regulators to account publicly. What role do you envisage for the Charity Commission in holding the new system to account?

Mr Wilson

There is this “three lines of defence” model that Etherington suggested. The final line of defence to make sure best practice is out there and people are conducting themselves properly is the Charity Commission. The Charity Commission will have considerably enhanced powers once the new Bill is through Parliament, and I would expect it to use those powers as is appropriate to make sure that we have a robust system right the way across the charity sector.

Mr David Jones

Mr Shawcross, do you welcome those new powers?

William Shawcross

Indeed we do, and may I add to your previous question, Sir? I totally agree that the freedom of the press and a vigorous free press is absolutely essential to any healthy society. I would hope that in this context the charities have learned their lesson that the sort of behaviour that was exposed by the Daily Mail must never be repeated. In answer to your second question to the Minister, we hope that means that the new regulator will not discover the sorts of abuse that the Daily Mail and The Mail on Sunday exposed this year. We, as I said before, are eager to collaborate with the new fundraising regulator. For an interim period while it is being set up under the new chair and chief executive, we will second someone from the Charity Commission to help them and to advise them. Under the new structures as envisaged, we will be the backstop for this system. I repeat: I hope that it works because I don’t think all charities should be regulated by the state. The vast majority of charities are run by decent, good people who seek to do good in their communities, and I do not think the state has to have its heavy arm upon them. I pray that the system will work.

Mr David Jones

Would you agree too that this is the last chance for self-regulation?

William Shawcross

Yes.

Tom Tugendhat

We have heard on several occasions people saying that this is the last chance for self-regulation. What would be the cost not only to the Exchequer, but also to charities, of statutory regulation? Have you any estimate of how many of the smaller charities would be forced to close because regulation would become more onerous?

William Shawcross

I have no estimate of that but I am sure a lot of small charities and trustees who give their time and their free evenings and so on would find it onerous. It depends how onerous, of course, the new regulations are imposed on them. As for us, we would need a new remit from Parliament. We would need new powers other than those that are already in the new Bill. Perhaps Michelle can talk about those. We would need new resources. I do not know how much. It would be quite a big job so we would need a lot more staff, and we would need, of course, time to set up any new regulatory system within the Charity Commission. I really hope that this self-regulation will work.

Tom Tugendhat

It would be fair to say that statutory regulation would massively change the tone of the charity sector.

William Shawcross

I think it would. Yes, that is a very good point. It would make the charity sector an arm of Government. As I have said before—I don’t want to be boring and repeat it—charity softens Government. Charity is independent. The voluntary spirit of this country is something quite precious. To quote Beveridge again, if I may, he said that the voluntary impulse in this country is “like a golden thread through the living tapestry of our national history”. My staff get rather bored that I say that so often, but it is a lovely phrase about the role of philanthropy in this country and it should not have to be fettered by regulation just because of the bad behaviour of some fundraising charities.

Tom Tugendhat

Thank you.

Chair

Minister, you mentioned the need to address culture as well as the regulatory framework.

Mr Wilson

Yes.

Chair

I think you are right, but what do you think we mean by culture, and how do we address it?

Mr Wilson

The system we currently have has, as I have said, been a pretty unaccountable system and has not been able to deploy sometimes the heavy artillery that is needed to make large charities think more about what they are doing and how they are outsourcing some of their work to these mass-marketing call centres.

Chair

Let us start again. What do we mean by culture?

Mr Wilson

The culture of the sector is by and large a very good one that is around the idea of volunteering and giving to others. What has happened is, among some larger charities, that culture has been corrupted in that, for example, vulnerable and elderly people have been seen as fair targets, and I think that that is a corruption of the culture of the charity sector.

Chair

We have seen some very highly regulated sectors in financial services, for example, designed to address that culture or a corrupt culture, but it does not work, does it? It does not make people better people, does it?

Mr Wilson

No. I am not suggesting—

Chair

How should we address the bad culture that has got into one or two of our charities?

Mr Wilson

I am not suggesting, Chairman, that higher regulation is something that we should do, except for if the proposals we are making do not work. What I think will help change the culture is a feeling of accountability, which is why immediately after the Olive Cooke experience we put two new things into the Charities (Protection and Social Investment) Bill, which enabled us to make trustees more accountable for their actions in terms of the contracts that they sign with these third party organisations, and also putting information into their annual accounts about how they are protecting vulnerable and elderly people. What we are trying to do is, as part of the culture of the sector, improve the accountability that exists so that trustees are more responsive, if I can put it that way, to problems—

Chair

It is hard to find the language, is it not? We, as a Committee, are still feeling our way through this question of culture, attitude and behaviour, which is not necessarily addressed by regulation.

Mr Wilson

Yes.

Chair

Do you have anything to add to this, Chairman of the Charity Commission?

William Shawcross

What you just said is quite correct, Mr Chairman. I do think that the question of culture is a limited one in a sense because I don’t think that what happened this summer represents the culture of the vast majority of charities; I really don’t. The vast majority of charities are aware of their role and their responsibilities and the trustees behave well.

Chair

I appreciate you are making that point, but it would be interesting if we could identify what elements have made for a neglectful culture or a blind culture among those particular charities and what lessons that has for governance of charities in general.

William Shawcross

Maybe Michelle would like to add to this. The problem has emerged among only large charities, large fundraising charities, but the harsh reality is that competition for funds, particularly for large charities, is fiercer and fiercer than it has ever been, and charities do need money to survive. The practices that those few charities employed were utterly unforgivable, but it is a tough world out there. Maybe Michelle would like to talk about how trustee guidance and so on is trying to help them in these issues.

Michelle Russell

Perhaps I could offer two thoughts. One is that the culture of an organisation comes from the top of the organisation, and that brings it right back to the governance of the organisation and the tone set by the trustee board, which comes back to their trustee duties. The second issue perhaps exposes the importance of the relationship between the donor and the charity, and perhaps what has gone missing or got lost over the years is the mutual respect and understanding and the importance of the relationship between a charity and its donors. As William says, many do do that well, but while some charities are treading the legal line very carefully to make sure that they are on the right side of the law, perhaps that moral code on top of it has become a bit lost and muddled. What has happened over the summer is a sharp reminder to all charities that that relationship with their donors is vitally important, and secondly, they do have a moral responsibility as well as a legal responsibility to get the relationship right.

Chair

How can we improve the capacity of the Charity Commission to promote that very, very cogent and obviously passionately felt thinking?

Michelle Russell

It comes back to good governance and strong financial management. Every year, in tackling abuse and mismanagement, we highlight those as core themes. No matter if it is child safeguarding issues, terrorism issues or fraud and financial mismanagement, those two core planks come back to every single charity, whether or not they are small, kitchen-table, a medium-sized national charity or an international charity, and it is a learning lesson that the commission has to continue making its guidance accessible, clearer, helpful to charity trustees, and equally charity trustees need to rise to meet their legal duties and responsibilities.

William Shawcross

If I may add to that, everything Michelle has said is absolutely correct and, as you said, spoken with great clarity and passion. The moral link between charities and beneficiaries and charities and donors, it is a three-way system that reaches both ways, and it is quite, quite correct. Despite all the concerns that are being expressed quite correctly this morning, I think it is important to remember that the vast majority of people in this country still do seem to have great trust in charities. We had a poll commissioned earlier in the summer—before Olive Cooke, I should add—that said that 72% of the public believe that charities in England and Wales are regulated effectively, and 88% had confidence in us. I do not want to emphasise that one. We are not talking about us. We do not want to show off. The vast majority of the public at that stage—I hasten to add, before Olive Cooke and before the revelations in the Daily Mail—felt that charities were an important and trustworthy part of society.

Mr Wilson

May I just say, these mass-marketing techniques are, by their very nature, quite dehumanising because you are essentially flooding enormous numbers of people with telephone calls and direct mail. One of the main lessons that we should learn from all this is that fundraising cannot just be a means to an end, and that donors need to be given much more control about how and whether they should be approached, effectively, and that will help to change the culture if you put more power in the hands of the donor.

Tom Tugendhat

The culture that you talk of sounds very statist in the larger charities, and the way in which they behave seems to me to be that of civil servants demanding money off the Exchequer. Would you agree that some of the problems may spring from people going from one form of government to, in inverted commas, “another”?

William Shawcross

Is this a question to me?

Tom Tugendhat

Yes, it is to you, Mr Shawcross.

William Shawcross

It is quite a difficult question, that. You are saying that charities are too much like Government Departments, are you?

Tom Tugendhat

I am suggesting that some link between those who have spent a long time in Government Departments, going off to be chief executives and trustees of large charities, may bring an attitude from one to the other.

William Shawcross

Some large charities are huge businesses—we must not forget that—and they have to be run as huge businesses. A charity that has an income of £500 million or something a year cannot be run like a kitchen table charity in a village. Obviously there are different modus operandi and perhaps different cultures developed, but it is important that all charities, large or small, remember what the nature of charity is. We are putting out a new charity guidance for trustees called “The Essential Trustee”, which we ask all new trustees to read. We require them to read it when they become trustees of charities, and it does spell out very clearly what the duties and responsibilities, and the joys, of being a trustee are, and I hope that that will have an effect. I think perhaps I should speak more publicly about these issues than I have done and write more publicly about them, and I know the Minister does that too, and it is something that we need to lead on. It is quite clear that that is a concern. This concern has to be addressed in every possible way. I hope it is not addressed by regulation because I think that is the last stop, and I hope that this new system that the Minister has devised with Sir Stuart Etherington works, and we will do everything we can to help it work.

Kelvin Hopkins

These values you talk about are very admirable and I think part of us, as human beings. The public service ethos is absolutely fundamental to society, but is not the real problem that we have been driven by an ideology in the last three or four decades that markets really count, not the public service ethos, and that this is gradually undermining and eating away at those charitable feelings?

Chair

Kelvin, that is one of your speeches.

Kelvin Hopkins

I have made my point.

Chair

Do you want to make a brief comment?

William Shawcross

I think that society has changed enormously in the last 60 years since the end of the 1940s, when William Beveridge made those wonderful remarks that I quoted. Charities, for example, ran all hospitals until 1948. The role of charities and the relationship between charities and the state, as well as charities and markets, has changed enormously. It is our job at the Charity Commission to help charities, to guide them through these difficult changes. We are the regulator. We are the policeman of the charitable world, but we are not the Stasi. We cannot intervene in every charity, nor would we wish to. It is the job of trustees to run their own charities. We are there to guide and help trustees, and I hope we will do that ever more effectively.

Chair

Before we move on to the question of Kids Company, may I ask a brief question about the recent court ruling concerning charitable funding of CAGE? What is the significance of this case?

William Shawcross

If I may quote from my learned friend Kenneth Dibble, who is our chief legal officer, he set out the lessons of this case in a letter to The Times this week. I will not read you the whole letter unless you wish me to. It is not a very long letter. He said that the case “made no change in our position in our responsibilities, our duties and our rights. The Commission’s ability to have regulatory engagement with charities under its powers, including asking for assurances about future conduct, and to move into inquiry mode if and when appropriate, remains intact and is unfettered by the case. Charities should, in the absence of good reason to the contrary, co-operate with the reasonable requirements and requests of the commission”.

Tom Tugendhat

I was going to ask a follow-on. How do you view your powers following on from this case? It is a very, very fundamental argument on the nature of charity and the nature of charities funding a third party group. I was wondering where you see your powers in reference to it.

William Shawcross

I quoted from Kenneth, because he has a better legal mind than I do, to say exactly that our powers are not changed in any way by this case. Michelle can tell you in more detail what she thinks of this.

Tom Tugendhat

I was actually going to say, do you feel they should be?

William Shawcross

There is the new Bill coming, which gives us greater powers. Michelle, may I hand that—

Michelle Russell

There are two points there. As William has said, nothing changes in terms of the remit and extent of our powers, and CAGE brought the litigation against the Commission. The Commission defended that litigation. CAGE withdrew that litigation on the basis that there was an agreement about the general nature of the Commission’s powers. The parties may disagree about what happened in the case, but the remit of our powers and our ability to not fetter the discretion of the trustees—there is a balancing act between the Commission as regulator, which cannot interfere with the lawful decisions of an individual trustee, but also, as regulator. The powers where there is a breach of trustee duty or about to be a breach of trustee duty, we have a regulatory role to either seek assurances that the breach will not happen, or the alternative is, of course, that if the breach goes ahead, we open an inquiry and take the regulatory action with the powers that we have.

Tom Tugendhat

On this incident in particular you were acting, I think, very much in the public interest. Your decisions were absolutely right and I think you behaved with absolute integrity. It is, however, a concern that two other charities that are large charities that have good trustee mechanisms, in theory, did not see what was so clear to you. It does call into question the trusteeship of those two charities. Have you sought to look any further at them?

Michelle Russell

Perhaps I should make it clear that our regulatory engagement with both the charities is continuing, so our report will be published shortly, once we have finished the process that happens as part of that case. Without commenting on the trustees of both of those two charities, the general point here is you are right—there are duties and responsibilities of trustees. Our job is to make sure that trustees do not breach those responsibilities, but secondly to remind charity trustees that in terms of public trust and confidence and their reputation they are under a duty to protect their reputation and act in the best interests of the charity. The Commission’s view is that we were reasonable and proportionate in terms of what we did in that case.

William Shawcross

If I may just add, our view still is, and is not in any way fettered by the court case, that trustees risk breaching their duties for charity trustees by funding groups like CAGE.

Chair

Thank you. I think it is fair to say that the court ruling was completely consistent with your advice to the charities concerned, that they should not have been funding CAGE, but there was a technical criticism in the judge’s ruling about how long you can make that assumption, if circumstances were to change. Have I understood that correctly?

William Shawcross

Yes.

Michelle Russell

I think we probably need to make it clear that the court did not make a ruling, a formal adjudication, so CAGE withdrew from the legal proceedings on the basis an agreed statement was made about the general remit of the Commission’s powers. There are always reflections to be had in relation to what has happened and perhaps on how we communicate what we do or do not do is something for us to take away.

Chair

Thank you for that clarification.

Mrs Gillan

Mr Shawcross, what concerns did the Charity Commission have about Kids Company and when were those concerns first registered?

William Shawcross

Do you mind if I hand this to Michelle?

Chair

May I just make a point? We are not going to be cross-examining the Minister on this question and if you wanted to leave us now you would be welcome to do so.

Mr Wilson

Thank you.

William Shawcross

I will just make one point. First of all, we do have a live statutory investigation into Kids Company and what has happened there, so Michelle and I are somewhat limited as to what we can say about it, which I am sure you will understand. I would just say briefly and then hand over to Michelle because she has been much more deeply involved in this than I have, that despite all the concerns that have subsequently come to light the Commission received remarkably few complaints about Kids Company before this summer. In hindsight, obviously there were problems in the charity but they were not brought to our attention.

Mrs Gillan

May I repeat the question? When were any concerns first registered with the Charity Commission?

Michelle Russell

In terms of the concerns about financial mismanagement, it was on 16 July this year, and the Commission took action the following day. Prior to that, the only formal regulatory record we have of dealing with a complaint of any nature about the Kids Company that is on our system goes back to October of last year, where there was an issue between a donor who was unhappy with what happened to their donation with Kids Company.

Chair

We will come to that particular issue later.

Mrs Gillan

So there was no concern with Kids Company prior to October 2014? No concern was registered with the Charity Commission?

Michelle Russell

On our system, so our system as a Government Department, I am unable to go back—

Mrs Gillan

No, hang on. You must have had a look at this now in preparation. No concerns were raised with the Charity Commission at all about Kids Company prior to 2014?

Michelle Russell

It has materialised from the public domain that there is a record of a charity coming to the Commission in 2002 raising particular concerns, so that has come forward, but other than that, according to what records we were able to get, the only complaint that is significant on the system is the October 2014 one.

Mrs Gillan

Okay, so in 2002 there was a complaint. What did the Charity Commission do with that information? Do you have that knowledge?

Michelle Russell

The difficulty we have is I was not there.

Mrs Gillan

I understand.

Michelle Russell

Our systems do not have the case records of that because of the Government Data Protection Act rules, so we have made some inquiries to try to get hold of some of that correspondence. We have clearly seen the letter from the charity that has made its way into the public domain complaining about Kids Company, but we are trying to pin down what the Commission’s response is.

Chair

Does the Charity Commission routinely destroy its records after a certain period?

Michelle Russell

I am afraid it does.

Chair

Is that a legal requirement or is that just a cost requirement?

Michelle Russell

No, it is not a cost requirement. There are requirements in terms of the Government procedures about retention of data and linked to Data Protection Act issues as to how long we keep it. Generally our records will be kept for five years. I think that is the current rule that applies to the Commission.

Chair

Obviously good cases make bad law, but is there any mood in the Charity Commission to review this question of data retention?

Michelle Russell

We reviewed data retention probably about four or five years ago, where we indicated that if a charity went into a statutory inquiry, given the significance of what a statutory inquiry is, we should keep those records effectively on our systems and they should not be subject to the normal disposal and destruction rules.

Chair

Would it not be a good idea to keep a permanent record of complaints?

Michelle Russell

If we did that probably our systems would be unable to cope with the volume of material that we deal with every year from members of the public and also our cases, but it is certainly something that we can look at again in terms of our data protection and data retention rules.

Mrs Gillan

Coming up to the more modern complaints about Kids Company, what action did the Charity Commission take, and how timely and effective were those actions?

Michelle Russell

It depends what elements we are talking about. In terms of the specific complaints that materialised about financial mismanagement, which came to us on 16 July, we acted within 24 hours. We notified the charity of what happened and what was being alleged and we had a meeting with the charity the following Tuesday, so within days. That resulted in certain actions that we insisted be taken in relation to dealing with those. Events unfolded, a lot in the media and as I am sure you will be aware we opened a statutory inquiry even after the charity had closed because of the nature of what was unfolding, and also the need to put public trust and confidence back in and on the record about what did or did not happen. Prior to that, we met with the charity in March of this year to discuss a number of things including the donor issue, but also in relation to its funding and some reports about employees leaving the organisation.

Mrs Gillan

How satisfied were you after those meetings that the actions you were taking were effective, and that the charity was remedying those areas that had been brought to your attention?

Michelle Russell

If we go back to the March meeting and engagement that we had, we left an open door. We wanted to be informed about what was going on, particularly in relation to the financial stability of the organisation. We met them again in June where we were told that there was a plan in place with new trustees who were waiting to come on. They realised the reserves position was not tenable and were making a restructuring plan to deal with that. In terms of in July when we had the meeting with the charity about the specific allegations of financial mismanagement, we reported seven different areas that we had allegations about that we had filtered were a regulatory issue. The trustees acted quickly to our response, and instigated the steps we required. By the Thursday PricewaterhouseCoopers had been brought in to investigate them properly and they were responding appropriately to the serious concerns that we were raising.

Mrs Gillan

We will come on to the PwC report in a minute. Did you have any communication with the Cabinet Office at that stage?

Michelle Russell

In July we were in almost daily contact with the Cabinet Office as things were unfolding.

Mrs Gillan

Do you have a sort of written standing order within the Charity Commission that if you have a concern about a Government-funded charity you flag it with Government immediately?

Michelle Russell

No, there is not a written or a standing order in relation to that.

Mrs Gillan

I am sorry, I am using parliamentary terms, but is it understood that you contact Government immediately?

Michelle Russell

It depends. So it depends what we are talking about in terms of specific concerns about financial mismanagement. We have to investigate those and ensure we deal with that in terms of due process, so as not to jump the gun in terms of what is there. Where it is a Government organisation we have a statutory gateway to exchange information with Government in a way, of course, that we cannot do with other donors.

Mrs Gillan

So what did you do? What is the exact timeline on when you informed Government that you were looking into the financial complaints about Kids Company? Can you produce a timeline and send it to the Committee? Is that possible?

Michelle Russell

Yes, that is possible, if the Committee would like that, but I am pretty sure that it was on the same day that we met with three ex-employees of the organisation, who brought their specific concerns to us, that we flagged up to the Cabinet Office that they needed to be at least aware that these allegations had been made.

Chair

On what date did you flag it up to the Cabinet Office? Was that before or after the—

Michelle Russell

There are two things. We contacted the Cabinet Office at the beginning of July when it was announced in the public domain that the chief executive of Kids Company was said to be resigning, so we made contact with them then. But in terms of the specific allegations that materialised about financial mismanagement, that was on 16 July.

Chair

So when did you notify the Cabinet Office that you had concerns, and was that before or after the final payment had been made by the Cabinet Office?

Michelle Russell

I wouldn’t like to answer that off the top of my head. What I can say to you is that on 16 July, when the concerns were brought to us, we alerted the Cabinet Office to that.

Chair

Okay, I understand that, but we are not quite sure how that interacts with the date of the payment. Obviously it is quite important from our point of view. We will find out.

Michelle Russell

I think the date of the payment was on 30 July.

Oliver Dowden

May I just ask very quickly, when you say you notified them, what was the nature of that notification? Was it chair to Minister or was it official channels?

Michelle Russell

No, it is officials to officials, because at that particular point we were in live engagement on a compliance case with a charity.

Chair

Was that in an email, or a letter?

Michelle Russell

It would either have been in writing or it would have been a phone call, which was probably either recorded or—

Chair

Could you clarify that for us, and if there is a written record of a telephone call or a letter or an email, could we have it?

Michelle Russell

It is likely to be email. A lot of the exchanges were email.

Mrs Gillan

It would be useful for this Committee, because we are trying to learn from this example as opposed to apportioning blame, if you could provide the audit trail, both for the timeline in terms of your contacts with Kids Company and also the documentation of the contacts with the Cabinet Office. That would clarify that for the Committee. This is probably a bit difficult for you to answer, but your aims and objectives as the Charity Commission and its role as regulator are “to prevent, detect and tackle abuse and mismanagement in charities”. Why did the Charity Commission fail to prevent, detect and tackle Kids Company’s financial management before its collapse? You were obviously in contact with it; you obviously had a history of looking at it. How did that happen?

Michelle Russell

There are two different things. There are specific allegations of financial mismanagement, which we dealt with when they materialised very quickly. The other broader issue, though, is about the solvency or insolvency of an organisation. The first thing to make clear is that there are many charities that fold every year. There are about 5,000 charities that leave the register every year for one reason or another and cease to exist. So the issue of insolvency in itself is not necessarily a regulatory issue. Many charities go through that. Secondly, this charity had an unqualified audit report, so it was signed off as a going concern every year, albeit there were comments made about or known about its cash-flow areas. So we did have the conversation with them when we looked at the accounts in March about the reserves and the financial stability of the organisation and, as I say, they had a plan in place which they were executing to deal with it, albeit they needed a £3 million grant to put that into practice.

Mrs Gillan

What sort of oversight do you have of the plan that they put into practice? Do you go back into the charity and check every week that they are implementing their plan? How do you exercise that oversight?

Michelle Russell

Again, just coming back to the two different issues, restructuring and getting a charity back on a footing that is financially stable is not necessarily a regulatory issue. So we were not overseeing either the terms and conditions of any grant or the restructuring plan. However, it is very different in terms of specific allegations of misconduct and mismanagement in terms of financial management, and we were on a not quite daily basis but in regular contact with the organisation, speaking to the chairman every week, speaking to the trustees about the progress that they had made, after we insisted that the PwC report was instigated.

Mrs Gillan

Could you also provide the Committee with the timeline of that as well—we would be grateful—and who spoke to whom on what occasion, and what was said. Thank you.

Chair

How tempting would it be for people in the Charity Commission to see that a Government Department is scrutinising and funding a charity and therefore regard it as likely that this charity is being well managed, because public money is being given to it, and that perhaps gave a false reassurance in this particular case?

William Shawcross

I think the fact that successive Governments had been involved with this charity for a very long time obviously shows a level of confidence on the part of Government in the charity.

Chair

How much do you think that affected what you did as the Charity Commission?

William Shawcross

I don’t think it affected us at all, because as soon as the problems came to light in the early part of this year we acted promptly and immediately. It is a tragic story in every way and I wish it had been otherwise, but I think that we responded properly and swiftly, as Michelle has said, as soon as the real problems came to light. We have had very good collaboration with the Cabinet Office. We always have, ever since I have taken on this job.

Paul Flynn

Shouldn’t there be a special vigilance from the Charity Commission about a charity that has extraordinary patronage from the highest in the land? The support was not coming from Government; it was coming from Prime Ministers and their wives, we understand. Shouldn’t alarm bells have rung with you? We know, we have a great deal of evidence, that journalists were handicapped. Their papers would not print the stories that they had because there was this general assumption that this was a wonderful charity, it was doing great work, because it was supported by Prime Ministers. But shouldn’t alarm bells have rung? You said you wouldn’t go along to the Treasury to ask for more money every year; you must have noticed that they were going along to the Treasury and asking for more money—millions—about every four or five months.

William Shawcross

I wish that we had had a regulatory cause to investigate the charity much earlier, but we didn’t have that, unfortunately. As for alarm bells ringing, well, alarm bells do ring and everyone should listen to alarm bells when they do ring; I totally agree with that. [Interruption.] But actually, to be fair to us, as I said at the beginning of this conversation, despite all the issues that have come to light since July, we had remarkably few reasons to engage with the charity before that. There were no complaints except the one that Michelle has already spoken about. You speak of the alarm bells now, Mr Flynn, and I totally understand why you do, but I think there is a lot of wisdom in hindsight in this—not in your particular case, of course, but there is the virtue of hindsight. Everyone is saying now that this was a flawed model. A lot of charities live hand to mouth and have very few reserves. In most cases it does not necessarily matter, but in this case it clearly did matter.

Paul Flynn

There was a great deal of foresight in this case and particularly from two journalists who in fact were writing about this a long time ago. It was because of the cowardice of their editors that it was not pursued. Can I ask you if you have any general rules to look at the charities, of measuring things, such as the salaries of chief executives and what percentage they are of the total budget of the charity? If it was excessive, would that sound alarm bells with you, or any other criteria that you would use to judge whether there is likely to be problems within a charity, if a possible abuse of that kind was detected?

William Shawcross

On the question of chief executives I will hand over to Michelle. On that problem I got into a lot of trouble with the charities early on in my time here because I said that charities should be very careful about the level of chief executive salaries. I was attacked by many charities for interfering with what is a trustee’s responsibility. I still maintain that fact—that in tough times like we are facing today, charities should be very careful about the level of chief executive salaries. I do not think it was particularly relevant in this case, but it is generally. But it is not for the Charity Commission to set salaries; it is for the trustees.

Paul Flynn

You described your job as being that of a policeman. Wasn’t the policeman sleeping on duty during this long period when alarm bells were ringing—not loudly, but certainly there was evidence from Ministers and others that things were not right? The word “mesmeric” was used about the lady involved, but there were two different factors here, as we experienced in a remarkable session a fortnight ago in which there was great influence being used by one woman, remarkably and almost implausibly—very difficult to understand—on Prime Ministers. It was Prime Ministers who were taking the decisions—not ordinary Ministers, not the Cabinet Office, but Prime Ministers.

William Shawcross

One must remember that Kids Company clearly did at some stage do good work for a lot of disadvantaged children. The second thing is, as I said before, we had very few reports about concerns before—remarkably few, given the understandable furore that has happened since July. If you had heard alarm bells ringing, Mr Flynn—I think you and I have a very good relationship and I wish you had told me about them before.

Chair

Just on this one point, there were alarm bells ringing in the press—Harriet Sergeant and her articles. What would have happened if she had come to you with a complaint?

Michelle Russell

We would have picked it up and we would have dealt with it. However, in February and March of this year, that is when we spoke to the charity about the concerns in the press.

Chair

Yes, but actually she was writing about the charity years before that. But you wouldn’t read an article and say, “There’s something fishy here. We ought to go and see this charity”?

Michelle Russell

Sometimes we do. So if you think about our investigative work generally, and this is relevant to the discussion earlier, roughly a third of our investigative work comes from members of the public, whistleblowers, coming to us with specific concerns. A third of it comes from other agencies and a third of it we pick up ourselves, including now by scouring some of the press and media concerns that are aired.

Chair

Of course, in her book, which I am referring to, years ago, she did not name the charity, but would that not invite you to say, “I wonder which charity this is. We ought to ring her up and find out”?

William Shawcross

Harriet Sergeant’s book and her work generally is superb; you are absolutely correct. With hindsight, I wish we had found a way to do more. Under the regulatory regime that we have, we had no legal reason—I think we are a law-based regulator—to go into the charity, but I accept your point.

Paul Flynn

It is a marvellous book. She is a great writer and she has served us well. What she put in the book, without identifying it, was a very accurate account of the abuses, but she could not get her editor to publish that because of their fear, because it was such a powerful institution. Is there not a special responsibility that you have to look with greater care at institutions that have royal patrons or prime ministerial patrons?

Michelle Russell

I suppose there are three things to say here. The first is that we as a regulator need evidence upon which to act, in order to take regulatory action. The second thing is, we do constantly and regularly now with the press, when they come to us about concerns about charities, say to them routinely, “If you have specific concerns and evidence can you please give it to us?” Some of them do and some of them don’t give us that evidence. The third point is that under William’s leadership and Paul Sussex’s leadership we are becoming much more proactive than we were before, moving away from that reactive to that proactive work. There is a limited amount that we can do about that, so one of the things that we are trying to do is to get much more systematic ability through tagging accounts to be able to pick the levers within the financial reporting of the 60,000 sets of accounts that we receive every year, so that we can pick out the cocktail of the different levers that would indicate something for us, even if there is no evidence for us to take a greater look with those particular charities.

Gerald Jones

My question is in relation to financial reserves for charities. Clearly we know the Charity Commission does not recommend a particular amount of reserves, but you do issue guidance in terms of what larger and more complex charities should bear in mind when formulating their policy. To what extent is Kids Company’s failure to build up reserves typical of other charities of a similar size and nature?

William Shawcross

It is a problem for all charities, as I said half an hour ago. The competition for resources is fiercer than ever before. It is very difficult for charities to build up reserves. We advise charities that they should spend their money, and at the same time they must have adequate reserves, so it is quite a hard act for them to follow. Recently this summer two substantial charities, BeatBullying and the British Association for Adoption and Fostering, both failed, without the sort of attention that Kids Company has been given. They were both good charities, but they did not have adequate reserves. It is a problem that all charities face—how much of the donors’ money do they spend and how much should they keep in reserve? I know that sometimes charities find that if they do have large reserves potential donors say to them, “You have masses of money in the bank; we don’t need to give to you,” so it is a really serious issue for charities. What do you think, Michelle?

Michelle Russell

It is probably more common than people realise, particularly in the current financial climate. There is no longer the ability for charities to plan and safeguard their funding for two or three years’ time. It is on a yearly basis now. As William said, there is that balancing act between having to spend the money to help their beneficiaries but keep their financial model sensible and have an eye about what they need. One of the difficulties we have in our guidance is providing guidance that applies to all charities. So for example what would be suitable for a PTA or a school would be very different from another charity. In reflecting what has happened over the summer, first, we are looking at our reserves guidance to see if we can be sharper, particularly for different types of charities. We think it is common sense, but clearly there is a need to give a bit more guidance than we are giving. In particular if it is a charity that is providing services or has employees or it is working with vulnerable beneficiaries, then clearly the trustees have a higher duty of care to make sure that their financial planning and their business model is much more robust and the safeguards are there. We know that there are some charities, believe it or not, that are in negative reserves. Clearly we need to make sure that there is a flexibility for the trustees to choose what suits them. The important thing from our perspective is, the buck stops with the trustees.

Gerald Jones

Do you think that more specific advice on the level of reserves would help trustees to have a bit more responsible financial management?

Michelle Russell

I think we will still err away from setting a limit or a threshold, for example three or six months’ reserves, because it depends for each individual charity. We have to tread the line carefully about not fettering or interfering with trustees’ discretion, but I think what we will say is they have to think about reserves, they have to be able to justify what level of reserves they hold and that they need for their particular services. We will clarify and sharpen up our guidance in light of what has happened over the summer.

William Shawcross

If I may add to that, it would be a terrible mistake if we laid down hard and fast rules for every little kitchen table charity in the country that does great work, that they have to have a specific amount of money in the bank. They raise money day-to-day, month-to-month, and I think the trustees do that well and they should be allowed to do it in the vast majority of cases.

Gerald Jones

In terms of the reserves and specifically around Kids Company, the Charity Commission guidance on reserves states that a charity without reserves should explain how the charity can prudently carry out its activities in its annual report. Kids Company’s reserves were either very low or sometimes in deficit. In their reports this is attributed to, “The charity’s history of delivering the maximum possible charitable objectives with the resources available” and, “The business model is to spend money according to need”. Specifically, how satisfied was the Charity Commission with the Kids Company’s justifications for its low level of reserves?

William Shawcross

That was their business model and clearly it failed, eventually. It worked for some time, and we have to remember that the accounts were every year signed off by very experienced accountants and audited. Just looking at the accounts, everything seemed to be in order. Is that right?

Michelle Russell

I don’t want to prejudice what the Commission will find or conclude in its inquiry, but it looks as if this is what happened. You had a very fast-growing organisation, which is not uncommon in the charitable sector. It had 500 or 600 employees. The reserves and the business model need to adapt with the growth of the charity. Clearly there were not enough reserves or enough financial planning for the stability of the organisation, but the reason why the charity folded when it did was a bit more complicated, and particularly related to it becoming in the public domain that the police were investigating in relation to safeguarding issues, which caused some of the donors to pull out the money that they would otherwise have put into the charity.

Gerald Jones

Were any specific warnings issued to Kids Company in terms of their level of reserves or any action taken by the Charity Commission?

Michelle Russell

Being honest with you, one of the things we struggle with is we have 164,000 charities. We receive 60,000 sets of accounts. We do not quite have the IT capability to interrogate those electronically, although there is a plan in place already to try to deal with that going forward. So we did have the conversation about reserves in March and, as I said, as things materialised in April, May and June the trustees realised that going forward they needed to change things significantly, put a restructuring plan in place. They were starting to do that. The new trustees who had been brought on board with particular skills and experience that they perhaps did not have on the board were very sharp and they realised that straight away. I have met one of them, and he was very impressive. They realised that they could not continue to have the reserves at that level with the business model that they were operating.

Chair

Just very briefly, a charity that would have adverse consequences on individuals if it closed is obviously a higher-risk proposition than many other charities. How do you take account of that in the allocation of your attention, or do you have any kind of risk assessment of different types of charities?

Michelle Russell

It is a very live issue for us at the moment. So the two areas where we are seeking to make improvements and developments are in our risk assessment of the different types of risks for different types of charities. There is a plan in place using the £8 million that we have been given as Invest to Save to improve that. So we will look at different formulas for different types of charity, for different types of risk. Also, in addition to that, as I have said before, if you are dealing with a sector that has a high number of employees or you are working with vulnerable beneficiaries, the duty of care that you have as trustees is very different to a grant-making organisation that can just decide not to give its further grants next year with little impact immediately.

Chair

Could you very kindly drop us a little note to expand on that question of how you look at charities with intense caring responsibilities? We will move on to the question of the PwC report, Mr Jones.

Mr David Jones

If we go back to mid-July, you told us, Ms Russell, that you had had a number of matters drawn to your attention by whistleblowers, which clearly caused you some concern. You had discussions with Kids Company and as a consequence of that Kids Company were directed to have an independent evaluation carried out of the substance of those allegations. That is right, is it not?

Michelle Russell

That was at our insistence, yes.

Mr David Jones

PwC were engaged to carry out that exercise. Did you specify PwC or did Kids Company specify them, or how was the appointment of PwC arrived at?

Michelle Russell

It was one of the names that we suggested, but the decision of who to appoint was ultimately up to the trustees. However, we said that we wanted to see the terms of reference for the investigation and to have oversight and sight of the results of it. We have used, for example, PwC as interim managers of a charity before, so the individuals that were raised or eventually did it were known to the commission.

Mr David Jones

So you required to see the terms of reference. Presumably PwC tendered for the work. Would you know about that?

Michelle Russell

I don’t know about that. You would need to ask the charity.

Mr David Jones

Did you see an exchange of correspondence between Kids Company and PwC in which the terms of reference were set out?

Michelle Russell

I believe we have on file a copy of the engagement letter with the fees attached, yes.

Mr David Jones

We have heard from Alan Yentob that the fee was some £50,000 for the report that I think was carried out in three days. How usual is it for the Charity Commission to accept reports that have been carried out by and on behalf of the charities that are under investigation?

Michelle Russell

It depends what you are talking about. Sometimes we insist, either by an action plan or by a direction, that the charity engages a governance review, for example, so we would point them to—there are a number of governance consultants in the sector or a number of auditors in the sector. That is quite common—to use an independent, well-respected firm to do so.

Mr David Jones

You were quite comfortable with the appointment, clearly?

Michelle Russell

Yes, we were comfortable with the appointment.

Mr David Jones

PwC began their work on 23 July. They concluded it on 26 July, and their report emphasised the very limited nature of the work they had been able to undertake, and they stated that the company has not carried out anything in the nature of an audit. What was the need for such a tight timeframe in preparing the report?

Michelle Russell

First of all, I just need to be clear that they only finished part of their task. We presented seven areas of regulatory concern distilled from the various complaints that were made by the ex-employees that needed to be investigated. A couple of those were quite serious, so they split the task in two, so the immediate piece of work that you are referring to looked at three or four of them, and the remaining work was to be done. They could not complete their task because the charity eventually folded, so their work was only partially done.

Mr David Jones

Are you saying that there was not a tight timeframe, and that more work was to be done, or was there indeed a tight timeframe?

Michelle Russell

No, there was a tight timeframe.

Mr David Jones

What was the reason for that?

Michelle Russell

Given the seriousness of some of the allegations that were being alleged.

Mr David Jones

Were you aware that Kids Company was negotiating with the Cabinet Office for a release of further funds?

Michelle Russell

Yes, they told us they had £3 million-worth of grant that they were expecting to be released.

Mr David Jones

Did the pressure to release those moneys play any part in the tightness of the timeframe?

Michelle Russell

Absolutely not. Not from our perspective, no.

Mr David Jones

You were in touch with the Cabinet Office, you have told us.

Michelle Russell

We told them. We made them aware that the allegations had been brought to us, yes.

Mr David Jones

Was that because of the potential of the release of public funds by the Cabinet Office?

Michelle Russell

I suppose it is, yes, in one sense, once we were made aware that the Cabinet Office was considering making a release of public funds. If we had heard allegations, and at that point we would not know whether or not they were proven or not, but as a responsible regulator and as part of Government we would at least notify the Cabinet Office that they existed.

Mr David Jones

Did you inform the Cabinet Office of the nature of the allegations?

Michelle Russell

Yes, in broad terms.

Mr David Jones

All seven of them?

Michelle Russell

Yes, but the charity itself of course made the Cabinet Office aware of what the allegations were and gave them a copy of the report.

Mr David Jones

Yes, which as you say was only a partial report into all the allegations that were made?