The Scottish Government

Scottish Charitable Incorporated Organisations (SCIOs) Working Group

Minutes of the second meeting, Monday 27 October, Victoria Quay, Edinburgh

Present:

Chair: Richard Dennis, (Scottish Government)

Gavin McEwan(Law Society of Scotland; Turcan Connell)

Stuart Cross(Charity Law Research Unit, University of Dundee)

Ken Butler(Scottish Drugs Forum)

Susan Deighan(Culture and Sport Glasgow)

Stephen Philips(Law Society of Scotland; Burness)

David Brownlee(Citizens Advice Scotland)

Nancy Fancott(Scottish Council for Voluntary Organisations (SCVO)

Adrienne Airlie(Institute of Chartered Accountants of Scotland; Martin Aitken & Co)

Steve Kent, (Edinburgh Voluntary Organisations Council)

Dr Patrick Ford(Charity Law Research Unit, University of Dundee)

Quentin Fisher(Office of the Scottish Charity Regulator (OSCR)

Secretary: Anita Popplestone (Scottish Government)

Minutes

Welcome and Introductions

1. The Chair opened the second meeting by welcoming new members Susan Deighan and Nancy Fancott and thanking them for agreeing to participate in the Scottish Charitable Incorporated Organisation (SCIO) Working Group.

Minutes of first meeting

2. The minutes of the first meeting were agreed. Arrangements would be made to publish minutes of Working Group meetings online but it was proposed that decisions on the publication of other papers would be taken by the Group, taking account of future planned publications (i.e. those which may have been submitted to journals).

3. The Chair confirmed that an invitation to STEP Scotland to join the Working Group had been sent but as yet no reply had been received.

Approval of remit and membership of the Working Group (paper 2)

4. The revised remit and membership of the Working Group were agreed. The Chair indicated that the Minister had been advised of the revised remit.

OSCR Statistics for the SCIO Working Group discussions (paper 3)

5. The Chair thanked OSCR for preparing a paper with the additional data requested at the previous meeting. It was noted that the data reinforced certain known characteristics of the Scottish charity sector, particularly that the most of the charitable income was focused in a very small number of charities and most of these were incorporated. The majority of charities in Scotland remained unincorporated and, while this was appropriate for many, there could be a significant number for whom this was not a satisfactory form. Interestingly, the company form was evenly spread across income bands, including those at the lower end of the scale. It was also noted that there was a fairly high turnover in terms of charity creation and dissolution, in that new charity start ups averaged at 104 per month and charity wind-ups averaged at 105 per month.

6. This again raised questions about the potential market for the SCIO and it was observed that it might not be as straightforward as identifying a particular income bracket. Perceptions of vulnerability among trustees of unincorporated associations were not necessarily related to the income of the charity. Similarly, charitable companies may not consider conversion to the SCIO form if the perceived benefits did not merit the cost of conversion. For larger charitable companies with sizeable resources, a reduction in administrative requirements may be of less significance.

Feedback from Charitable Incorporated Organisation (CIO) consultation event, Leeds, 21 October - Anita Popplestone

7. The CIO stakeholder event for charity trustees and employees, held in Leeds on 21 October, was jointly hosted by the Office of the Third Sector and the Charity Commission. The event had attracted representatives from both unincorporated associations (of varying sizes) and charitable companies. In introducing the proposals, officials explained that the legal framework was necessarily complex to provide for all eventualities but would not all be of immediate relevance for users. It was expected that the CIO would become available late in 2009. Before implementation the Charity Commission would produce more information on procedures and timescales.

8. Discussion at the event had ranged across a variety of issues, such as:

·the minimum age of trustees (whether to follow charity or company law);

·the option for the disapplication of the CIO duty of care (drawing on the example of trust law in England and Wales);

·additional information requirements (a register of members could be extremely difficult to administer for a very large membership charity and could lead to loss of membership);

·accounting provisions (should CIOs follow accounting requirements in charity law, being more flexible and proportionate or company law which would provide more accountability and give a "true and fair" view of a charity's finances?);

·constitutions (were the model governing documents too complex for smaller charities or should they be more specific to allow for every eventuality?);

·pensions (unincorporated associations may have to notify any pensions liabilities to the Pensions Regulator on incorporation as a CIO)

Consideration of the Office of the Third Sector'sThe Charitable IncorporatedOrganisation: Consultation on the new corporate form for charities- Discussion paper(paper 4)

9. The paper on the CIO consultation focused on the questions it raised for the policy development of the SCIO. The differences in primary legislation would necessitate some divergence in the design of the regime and supporting Regulations. Unlike the CIO, there could not be a single member SCIO, as the 2005 Act required that a SCIO have two or more members. Although there were clear reasons for having more than one member in terms of good governance, it was suggested that the original Bill instructions for the member provisions might provide some explanation for the different approach taken in Scotland.

Action: Scottish Government to check Bill instructions for SCIOs member provisions.

10. The substantive discussion centred around the consideration of the CIO model from a Scottish perspective, weighing up the respective benefits of a very detailed regime built on company law, which offered clarity and familiarity, against those of a much simpler model, which had the potential to be more flexible and adaptive. Some of the main areas of discussion included:

Legal forms and third party buy-in

·The CIO had been developed on the model of the company limited by guarantee but were there alternatives that might be better suited to smaller charities whose governance was based on brief constitutions and case law? Other legal forms which were not as detailed as the company form included Industrial and Provident Societies (I&Ps) and Limited Liability Partnerships (LLPs) and both had been shown to work effectively, engaging successfully with lenders and businesses.

Action: Scottish Government to write inviting representations from third parties, including banks, the Council of Mortgage Lenders, grant-giving organisations, COSLA, to test whether the SCIO form would have credibility with lenders.

·The Group wished to explore further the question of whether third parties would engage with a legal form that did not include the detailed protections enshrined in company law. However, the recent well-publicised example of the collapse of a large incorporated charity might suggest that these protections were no guarantee of good governance within an organisation.

Members' rights

·The Group questioned whether it would be necessary to include entrenched rights for members or powers to remove persons within the SCIO model. A key policy driver for the Companies Act 2006 was to increase member participation and engender member ownership in companies. However, these members' rights had not been imported into the CIO model on the basis that they were unnecessary, as members did not have a financial stake in the good governance of the CIO, but the consultation had highlighted the role of CIO members as an area for debate.

·However, it was noted that the inclusion of members' rights might attract more support and involvement of volunteers.

·It was suggested that OSCR already had broad powers to intervene, which may cater for scenarios where the rights and powers of members might be drawn on. However, it was also noted that OSCR's primary function was not to ensure good governance although the Regulator may intervene as a matter of last resort. Some Group members were of the view that the checks and balances built into company did not guarantee good governance either.

Insolvency

·There was broad agreement that the approach taken to adopt existing corporate insolvency law for the CIO was a sensible one, as Group members saw no need to develop a new form of insolvency.

·If the SCIO is a form exclusively for charities, would this mean that in the event of de-registration, the organisation would cease to exist and its assets were to be held in trust?

Constitutional Requirements

·A key question for the SCIO would be the extent to which constitutional elements were dictated in statute. As there was no parallel requirement in the Charities Act 2005 stipulating that standard constitutional forms must be set out in Regulations (as was the case for the CIO), the Group would need to consider the degree of specificity when it came to defining core constitutional requirements.

·There were certain attractions to spelling out the complex detail in prescribed constitutions, catering for every conceivable situation, in that they would provide a greater degree of certainty, transparency and not be open to over-variation. New charities would be spared the difficulty of developing constitutions from scratch and in view of the large proportion of calls to the SCVO advice line which concerned constitutions, this could prove popular with new start-ups. It would also be far simpler for OSCR to process and approve standardised constitutions and parent charities may also find the audit of branch/subsidiary constitutions more manageable.

·There were risks attached to this approach in that it was doubtful whether one or two models would fit all types of charitable organisation or address every requirement, resulting in an increased likelihood of breach.

·Perhaps the issue for debate was not on the level of detail in model or exemplar constitutions but whether or not they were mandatory. If a more flexible approach were to be adopted this would not preclude the preparation of off-the-shelf model constitutions for smaller charities.

·Were the two models based on governance types the right ones or should there be consideration for differences in income/asset levels?

·What would funders be looking for in SCIO constitutions? There were some suggestions that major funders might prefer membership bodies, however constituted as they tended to indicate grass-roots involvement. Others might prefer incorporated bodies (membership based or otherwise) because this suggested a higher degree of organisational sophistication and clearer governance and accountability arrangements.

11. The Group agreed that it might be useful if further work was undertaken to identify the essential elements that a SCIO constitution would require, with attention given to a plain English explanation of the clauses. However, it would be important not to lose sight of the core principles to which many third sector organisations were committed, namely those of accessibility, inclusivity and participatory democracy and, to that end, discussion should focus on structures and participation over technical detail.

Action: Scottish Government to arrange a sub-group to consider essential elements of a SCIO constitution.

SCIOs Research Project - Dr Richard Whitecross

12. Dr Whitecross provided an overview of the initial scoping work undertaken thus far for the research project to support the Working Group's considerations. It was emphasised that the initial key informant interviews were intended to test the extent of awareness and knowledge of the SCIO form among stakeholders but that the future direction of the research should be guided by the Working Group to inform its work.

13. The themes touched on in the substantive discussion of the meeting had also emerged in the interviews. 16 interviews had been conducted with a range of stakeholders from representatives of unincorporated charities and charitable companies to professional advisers. There was a clear interest in the SCIO form, often motivated by the move towards contracting with local authorities, but a degree of confusion as well, particularly as to what it would be and when it would become available. Some organisations had incorporated as companies limited by guarantee in the intervening period since the passage of the Bill, but were not considering conversion to SCIO status due to resource implications for those charities with incomes under £250k; whereas the larger ones would need to see clear benefits to be tempted to make the change.

14. Amongst the professional advisers, questions were raised as to reserved/devolved competence issues, and interaction with European and international banks. Amongst the charity representatives, the issues of liability and the desire to protect valuable volunteers and trustees were of most importance. It was also thought that the SCIO might help to clarify management structures within charitable organisations. The Working Group agreed that a small number of focus groups be arranged, comprised of a range of different sizes and types of charities, professional advisers and those involved in charity finance to discuss questions posed by the Working Group.

Action: Scottish Government to arrange focus groups, drawing on suggestions of possible participants and questions to be put forward by Working Group members.

Discussion of future programme of work, agreement of meeting dates and agenda items (paper 5)

13. It was proposed and agreed a colleague from the Office of the Third Sector or Charity Commission, with responsibility for the CIO consultation, be invited to address the Working Group's next meeting, to provide an overview of the policy development process for the CIO.

Action: Scottish Government to invite Office of the Third Sector/Charity Commission colleague(s) to discuss the CIO consultation at the Working Group's next meeting.

14. It was proposed and agreed that further consideration be given to SCIOs' accounting requirements as this was a very significant administrative task for charities. In addition, issues of interest to members, such as special procedural requirements, were put forward as an area for future consideration, as was winding-up and dissolution.

Action: Scottish Government to include accounting, membership and dissolution issues in future programme of work.

Scottish Law Commission Project - Unincorporated Associations

15. Charity Law Team officials had met with Scottish law Commissioner Colin Tyre, QC to discuss the SLC's project on unincorporated associations. From that discussion it was clear that there were mutual areas of interest and that the Working Group may benefit from hearing more of the SLC's work. Publication of a Discussion Paper on unincorporated associations was planned for December and it was proposed that the Working Group invite Colin Tyre to address a future meeting, during the consultation period.

Action: Scottish Government to invite Colin Tyre QC to address a future Working Group meeting in January on the SLC's discussion paper on Unincorporated Associations.

Liaison with Companies House, Edinburgh

16. A meeting had been arranged between the Chair and the Registrar of Companies in Scotland to discuss SCIOs and the issues of relevance for Companies House, such as conversion. In particular, it would be important to assess the potential impact of introducing a SCIOs regime for OSCR as the sole regulator.

Action: Scottish Government to meet with the Registrar of Companies in Scotland and report back to the Working Group

Any other business

17. There was no other business other than the venue of the next meeting on which the Chair invited members to email with suggestions.

Action: Working Group members to email Scottish Government with suggestions of alternative venues for meeting on 15 December.

Summary of action points:

Scottish Governmentto: Check Bill instructions for SCIOs member provisions.

Write inviting representations from third parties, including banks, the Council of Mortgage Lenders, grant-giving organisations, COSLA, to test whether the SCIO form would have credibility with lenders.

Arrange a Sub-Group to consider essential elements of an SCIO constitution.

Arrange focus groups, drawing on suggestions of possible participants and questions to be put forward by Working Group members.

Scottish Government to invite Office of the Third Sector/Charity Commission colleague(s) to discuss the CIO consultation at the Working Group's next meeting.

Include accounting, membership and dissolution issues in future programme of work.

Invite Colin Tyre QC to address a future Working Group meeting in January on the Scottish Law Commission's Discussion Paper on Unincorporated Associations.

Meet with the Registrar of Companies in Scotland and report back to the Working Group.

Working Group Members to e-mail Scottish Government with suggestions of alternative venues for meeting on 15 December.