Scottish Charitable Incorporated Organisation - Report on Focus Groups, Dr Richard Whitecross, Scottish Government

Background

Under the Charities and Trustee Investment (Scotland) Act 2005 ss 49 - 64 provide for a new incorporated legal form for Scottish Charities, the Scottish Charitable Incorporated Organisation (SCIO). The purpose of the SCIO is to provide an alternative to the current legal forms, notably as charities limited by guarantee. At present, these provisions have not been brought in to effect.

The Working Group is currently considering the implementation of the SCIO. To provide the Working Group with an overview of perceptions, understanding and issues around SCIO a series of interviews were carried out and a report submitted to the Working Group in October 2008. The Report recommended holding a series of focus groups with:

• Unincorporated associations
• Charities (of varying sizes)
• Professional Advisers (accountants and lawyers)

The Working Group was invited to identify the themes and issues to be explored in the focus groups. Members of the Working Group proposed the following:

• Who is going to benefit from a SCIO?
• Who will our priority group or groups be?
• will regulation through a single regulator result in a significant easing of the burden?
• Should SCIO accounting follow the rules for companies (full accruals for all regardless of size); or should they follow the rules for other charities (simpler "receipts and payments" accounts for smaller charities).
• Explore perceptions of the protection corporate status confers versus the reality.
• Model constitutions: how rigid/flexible should they be?

Methodology

The Courts and Constitution Analytical Team (CCAT) approached lawyers and accountants and snowballed participants for the focus group with professional advisers. S Kent (EVOC) approached a wide range of charities in the Edinburgh area to participate in the second focus group with charities and unincorporated associations. The Charity Law team identified and contacted participants for the final focus group. Members of the Charity Law Team attended each focus group and were able to participate in the discussions.

The focus groups were held on the undernoted dates and locations. We wish to thank Lindsays WS, EVOC and the Scottish Drugs Forum for their support:

• Professionals (accountants and lawyers) Thursday 4 December 2008 at the offices of Lindsays, WS.
• Charities and Unincorporated Associations Thursday 18 December 2008 at the offices of EVOC.
• Charities and Unincorporated Associations (officials and finance officers) Tuesday 13 January 2009 at the offices of Scottish Drugs Forum.

Key Findings

The main features of the three focus groups are set out below under thematic headings.

Understanding of the SCIO

• Generally, there was limited understanding of the SCIO.
• However, among the charities and unincorporated association there was significant interest in the possibility of becoming a SCIO.
• This interest in SCIO was accompanied by frustration at the length of time to bring the SCIO into force.
• It was suggested that there needed to be better clarity of the 'target audience' for SCIOs.
• The need for a different regime to England & Wales was questioned in all of the focus groups.

Benefit of the SCIO

• A new form of charity could encourage participation, as there are problems in recruiting and retaining trustees.
• The process of becoming/converting to a SCIO should be straightforward, simple and cost effective.
• There was a suggestion that SCIO should be sufficiently simple to remove the need for professional advisers.
• The professional advisers were unclear who would benefit from the introduction of the SCIO.
• It was noted by the focus groups that excessive cost (this seemed to be any cost in excess of £100) would put some, especially small charities, off converting to SCIO status.
• There was a general consensus that SCIO should seek to alleviate the administrative burdens of company law, particularly the form-filling requirements.
• It was suggested that SCIO should offer new structural form for Scottish charities. However, the actual form of this new structure was not discussed.
• Reporting to a single regulator was seen as a positive.

Potential difficulties were highlighted with the conversion of existing charities to SCIO. These include:

· The possibility that the conversion process may crystallise any liabilities which the charity currently has (e.g. pension deficit)

· Potential legal problems with creating links in title and transferring property and leases to any new legal entity.

· Funders/creditors understanding and acceptance of the SCIO.

· Potential for members of a SCIO to not fully understanding the responsibilities and duties placed on them.

· Potential for charities to adopt model constitutions reflect the aims and objectives of the organisation.

· Concerns were raised that the SCIO may have different requirements from other forms of charity.

Regulatory burden

• There was a general aspiration that SCIO will reduce the current regulatory burden.
• However, there was no consensus on how onerous or problematic complying with the current regulations actually is for charities.
• Among the professionals, concerns were expressed that funders would not recognise or be unwilling to amend current documentation to recognise the new legal form. This view was, however, challenged in the final focus group.
• There was widespread support among charities and unincorporated associations for OSCR to assume the role of Companies House.
• However, it was recognised that this would place significant new demands on OSCR if it is to fulfil the various duties currently undertaken by Companies House. E.g. provide members' register, certificates of "Good Standing" etc.
• There was a suggestion that the Companies Act could be made more "charity friendly".

Constitutions

• There was a general lack of consensus on the use of model constitutions.
• A number of charities have used the draft model constitutions prepared earlier but there were concerns that in doing so they have may have adapted themselves to fit the model constitution, rather than create a constitution that fits their organisation.
• From the users' perspective there was a strong plea that any model constitution be accessible and in Plain English.
• Concerns were expressed over model constitutions not being sufficiently flexible.
• Although some charities and unincorporated associations were keen to be able to acquire the model "off the shelf", it was suggested that it should provide the framework but still allow for adaptation by the organisation.
• Alternatively, for very small organisations "off the shelf" constitutions should be available with larger organisations being required to develop their own.

Limited Liability

• Participants considered that the main potential benefit of the SCIO would be the removal of the possibility of personal liability. The issue of personal liability was generally agreed to be an inhibiting factor to recruitment and retention of charity members/officer bearers.

· There was general consensus that the limited liability provided by the current company limited by guarantee is important and positive. It provides a degree of reassurance that trustees will not be personally liable for debts.

· However, this was also widely recognised as not being applicable in cases of wilful negligence or fraudulent activity

· Therefore although the company limited by guarantee does offer limited liability, trustees may still be held liable. It was suggested that the SCIO would not improve the situation for trustees. Rather, it was thought that SCIO may extend the trustee duties under section 66 to members as well (c.f. section 51).

· It was suggested that if SCIOs were to provide limited liability that the accounting rules should be SORP compliant to ensure the necessary transparency for third parties.

· Trustee Indemnity Insurance (TII) - A limited number of organisations provide this, at substantial cost - c£5000. However, the premium would vary depend on the value of the trust fund and experience of the trustees. TII is not comprehensive and does not cover ultra vires acts or wilful negligence.

Accounting

· The current dual accounting system presents practical problems, especially for those organisations who cannot afford professional advice.

· There was no clear view on whether the accounts should be receipts and payments or fully accrued. R& P accounts were viewed as not sufficiently detailed to satisfy funders/creditors, whilst fully accrued accounts were difficult for lay people to understand.

· It was noted that funders often required an audit therefore fully accrued accounts were necessary.

· Using income as the basis for deciding which form of accounts should be completed was questioned. It was noted that some charities which qualify for R&P accounts may have complicated funding structures, while charities which have to complete fully accrued may have simple structures.

· It was suggested that if fully accrued accounts were required for all SCIOs, that small SCIOs (not defined) should not be required to have their accounts examined by a qualified person.

Funders

• Most participants did not think that a new form of charity would create any new issues for funders.
• Funders currently deal with a wide variety of types of charity, with the fact that they are a charity often the most important fact, in that being regulated by OSCR was considered to provide reassurance.
• One participant suggested that some institutions, including banks seemed unaware of the charity's form and ignorant of the fact that it did not have legal personality.
• This might suggest that the form of the charity was not considered relevant by some third parties.

· With regards insolvency procedures, it was generally felt that current processes were satisfactory, and that there was not a need to create something new.

Charitable Incorporated Organisations (CIOs - England and Wales)

· The general view was that if a new form was to be introduced (and this was not assumed to be necessary) the English & Welsh model of CIO should be adopted for UK wide operation.

· The view was expressed that charities in England and in Scotland are very similar and it would therefore make sense for Scotland to use the CIO model.

· However, it was also mentioned that the CIO would not work in its current form: it demonstrated that it was not possible to deliver a simpler form of incorporation, as the CIO was simply a reinvention of the company limited by guarantee.

· Concerns were expressed during two focus group meetings that in developing the SCIO that there should be no unnecessary duplication of work.

· All groups noted the tension between a desire for simple and straightforward SCIO and the requirements for regulation and security.

· One person suggested waiting for 5 years after the introduction of the CIO and assessing the impact before making a decision on whether to introduce the SCIO.

Additional comments

• Better access to information across a range of issues was raised and it was suggested that this should be part of a communications strategy supported by the Scottish Government.
• There was limited awareness within the Scottish charity sector of the UK Government's consultation Charitable Incorporated organisations (for England and Wales).
• The importance of developing a variety of approaches to reach and educated charities and unincorporated associations was highlighted in the second and third focus groups.
• Concern was expressed about charities which operate outside Scotland and the UK as Non-Government Organisations and the need to be in a recognised legal form.