Decision

Charity Inquiry: Hospice Aid UK

Published 31 March 2023

Applies to England and Wales

The charity

Hospice Aid UK (‘the charity’) was registered as a charity on 24 June 2002. It is governed by a Memorandum and Articles of Association, incorporated on 21 March 2002 as amended by Special Resolution passed on 5 July 2006.

The charity’s objects are (A) to facilitate and promote the relief, care and treatment of the sick, especially of the dying, and the support and care of their families and carers and of the bereaved; (B) to facilitate and promote the charitable activities of independent hospices; (C) to undertake any other charitable purpose.

The charity’s entry can be found on the register of charities.

Background and Issues under Investigation

There has been a history of engagement with this charity which resulted in the opening of an inquiry (‘the first inquiry’) on 28 August 2014. That inquiry closed with the publication of a report on 21 December 2016.

The charity submitted accounts following the closure of the first inquiry and prior to the opening of the inquiry for its financial years ending 31 March 2016, 31 March 2017 and 31 March 2018. On average over those years the accounts disclosed that less than 1% of its recorded income was applied by way of grants in furtherance of its charitable purposes.

The charity’s accounts for the financial year ended 31 March 2018, which were submitted to the Commission on 18 January 2019, recorded that the charity had net current liabilities and negative funds carried forward of £140,023 at the balance sheet date, giving rise to concerns as to the charity’s solvency.

The charity also failed to fully comply with an order of the Commission issued during the first inquiry dated 4 July 2016 which required, amongst other actions, that the trustees disclose in their annual reports the outline terms and performance of the agreement entered into with a fundraising agency.

The charity’s accounts were difficult to interpret, particularly in respect of the salary and fees paid to the charity’s Chief Executive Officer (‘CEO’) and whether the amounts were reasonable given the low level of charitable activity. In addition, it was not clear to what extent the trustees had monitored and appraised the CEO’s performance.

One of the trustees appeared to be a member of the CEO’s family and it was not clear to the Commission how this trustee was recruited, selected and, if applicable, remunerated by the trustees nor was it clear to what extent any potential conflict of interest had been managed by the trustees.

On 20 September 2019 the Commission opened a further statutory inquiry (‘the inquiry’) into the charity under section 46 of the Charities Act 2011 (‘the Act’). The inquiry closed with the publication of this report.

The inquiry was opened to examine the following issues:

• the proportion of the charity’s income applied for exclusively charitable purposes
• the adequacy of the fundraising arrangements and the extent to which these arrangements are monitored and managed by the trustees
• the extent to which the charity is solvent and financially viable
• the extent to which the trustees have complied with their legal duties and the advice, guidance and directions previously issued to the charity by the Commission
• the extent and adequacy of the trustees’ policies and procedures in relation to the recruitment, appointment, monitoring and management of staff and the extent to which staff performance is reviewed and assessed by the trustees
• the extent to which potential conflicts of interest are identified and managed and the degree to which such identification and management by the trustees is adequate

Findings

The proportion of the charity’s income applied for exclusively charitable purposes.

During the first inquiry, it was established that the charity had entered into a 7-year direct mailing agreement in 2012 with a specialist direct marketing and fundraising agency (‘the fundraising agency’). During the inquiry, it was established that the charity had entered, into a renewed 5-year direct mailing agreement in 2017 with the same fundraising agency.

Direct mail fundraising is sending mail to the public with the aim of raising money. There are two types of direct mail fundraising: donor renewal mail and donor acquisition mail. Donor renewal, or warm, mail is sent to existing donors whereas donor acquisition, or cold, mail is sent to people who have no prior involvement with the charity. To establish a list of warm donors, direct mailing programmes require considerable initial investment and resources to work successfully.

There are specific rules that must be followed if a charity uses a ‘professional fundraiser’. The Charities Act 1992 (‘the 1992 act’) and associated statutory regulations require professional fundraisers to follow certain rules when fundraising for a charity or charitable purposes. This includes making a detailed declaration, known as a solicitation statement, to the public when soliciting funds on behalf of the charity. The regulations are designed to enable donors to make an informed decision, knowing how much of their donation will reach the charity and the proportion that will be retained by the professional fundraiser.

The first inquiry established that neither the trustees nor the fundraising agency considered that the fundraising agency was acting as a ‘professional fundraiser’ pursuant to the definition in the 1992 act. However, as in the case of the first inquiry, the Commission continues to consider that the fundraising agency is a ‘professional fundraiser.’ It is acknowledged that the trustees of the charity took professional advice and disagree with this finding.

The fundraising agency carries out an extensive range of functions that solicit or procure donations from the public on behalf of the charity. These functions include developing the strategy for the charity’s direct mail campaigns, drafting the letters and artwork to be used in those campaigns; populating mailing lists; selecting, briefing, and managing the ‘data processing’ and ‘handling’ contractors; ordering stationery; managing the ‘mail house’ and preparing reports on the results of the agreement.

The first inquiry established that the fundraising material issued to the public by the fundraising agency on the charity’s behalf contained no solicitation statement or explanation about its arrangements with third parties or the proportion of funds raised that the charity expected to be available to it net of costs incurred. The trustees in place at the time told the first inquiry that they did not consider it necessary to include a solicitation statement because they considered the arrangements fell outside of the statutory regulations. As mentioned above, having considered the agreement and evidence about the arrangements in place, the first inquiry took the view that the fundraising agency was acting as a professional fundraiser on behalf of the charity and that there was therefore a breach of the requirement contained in section 60(1) of the Charities Act 1992 to provide a solicitation statement in fundraising materials sent to potential donors.

The inquiry also took the view that the fundraising agency has been acting as a professional fundraiser on behalf of the charity. However, even when a third party does not consider itself to meet the definition of a professional fundraiser, a charity’s reputation may be subject to unacceptable risk and damage if donors are not given a fair indication of the arrangement, or the costs involved.

Charities are expected to be transparent with their donors in their fundraising activities, particularly where someone is not employed directly by a charity, but fees or commission are taken or paid from money collected or raised from the public. The first inquiry found that the fundraising material issued under the agreement on the charity’s behalf lacked sufficient transparency to allow the public to make an informed decision when considering whether to donate to the charity and was misleading to the public since it implied that all donations would go to the charity. The trustees at the time knew this was not the case but did not take the initiative to address the issue. To ensure that the charity’s arrangements with the professional fundraiser were sufficiently transparent to the public, and to ensure the trustees at the time were acting in furtherance of their trustee duties, the first inquiry issued an order under section 84 of the Act in July 2016 to direct the trustees to include a solicitation statement in any written material issued under the agreement. It is noted that the trustees at the time did take this step and a solicitation statement has been included in the charity’s fundraising material since that date.

For the avoidance of doubt, as defined in section 58(1) of the Charities Act 1992 in England and Wales, a ‘professional fundraiser’ is: (a) any person (apart from the charitable institution or a company connected with such an institution) who carries on a fundraising business, or (b) any other person (apart from a person excluded by virtue of subsections (2) or (3)) who for reward solicits money or other property for the benefit of a charitable institution, if he does so otherwise than in the course of any fund-raising venture undertaken by a person falling within paragraph (a) above.

The inquiry found that fundraising activities carried out under the agreements over the past 10 years with the fundraising agency generated substantial funds. However, during the lifetime of the agreements, the funds generated have largely been consumed by the direct costs and fees associated with raising them. A ‘Gross Revenue and Expenses’ spreadsheet provided by the charity’s legal adviser recorded outcomes for each of the financial years ended 31 March 2013 to 2020 and the subsequent period up to 14 July 2020. The spreadsheet recorded a cumulative total income of £3,231,962 but cumulative direct costs and fees of £3,041,821 leaving just £190,141 available to the charity. This figure represents less than 6% of the total amount raised from the public which would have been available to cover the charity’s overheads as well as in furtherance of the charity’s purposes.

The regulatory actions taken by the Commission at the conclusion of the first inquiry included the production of a s84 “governance and management” action plan. The trustees were directed to deliver “a tangible improvement in the percentage of the charity’s income that is applied directly for charitable purpose.” Whilst there has been a small overall improvement, the trustees’ compliance with this aspect of the s84 order falls short of the Commission’s expectations. In the Commission’s view, it is difficult to see that the modest improvements made can fully prevent the risk of damage to the charity’s reputation arising from the relatively small portion of the charity’s income which has been applied for charitable purposes.

Analysis of the charity’s more recent accounts for the financial years between 2018 and 2022 illustrates the very low level of charitable activity (which is limited to the provision of direct grants to hospices) relative to all funds raised by or for the charity:

Financial Year Ended	Income	Grants to Hospices
31 March 2018	£404,036	£7,393 (<2% of total income)
31 March 2019	£498,366	£35,792 (7.2%)
31 March 2020	£333,749	£38,691 (11.6%)
31 March 2021	£516,901	£38,251 (7.4%)
31 March 2022	£368,523	£129,496 (35.1%)

The inquiry finds the continued low level of funds applied directly towards the charity’s purposes relative to the charity’s total income and the trustees’ inability to substantially improve these figures presents serious trust and confidence concerns. The inquiry notes that the trustees were given a three-month extension to submit their 2021 accounts. Despite this the accounts were not submitted until 31 August 2022 which was 122 days after the extended deadline. This failure to submit the charity’s accounting information within the statutory deadline is misconduct and/or mismanagement in the administration of the charity by the trustees. The Trustees are aware of their filing duties and submitted the financial statements for the financial year ending 31 March 2022 on time.

The adequacy of the fundraising arrangements and the extent to which these arrangements are monitored and managed by the trustees.

The inquiry was not provided with evidence or records to show that the trustees met to undertake due diligence and review the past performance of the fundraising agency before they entered into the renewed agreement in 2017 (‘the second agreement’). Whilst it is understood the trustees in post at the time may have received professional advice before entering into the second agreement, the Commission has not been provided with information that demonstrates this decision was taken in the best interests of the charity or any evidence to show how the decision was made. The inquiry found that the second agreement, which ended in July 2022 provided that the charity was liable for all costs without limitation.

The inquiry was advised by the trustees that they had agreed a simplified method of reporting with the fundraising agency. This method of reporting, for example, identified that certain types of fundraising mailshots were not producing good results, and this led to the cessation of certain fundraising activities. Although regular reports were received from the fundraising agency the inquiry further found that the trustees and CEO did not exercise sufficient scrutiny of costs incurred and paid for or liable to be paid for under the agreements. These failures by the trustees and the CEO to adequately monitor and manage the fundraising arrangements are misconduct and/or mismanagement in the administration of the charity.

During the first inquiry the Commission issued a section 84 Order which required the charity to improve the information it provided in its accounts in relation to the fundraising agreement. In this context, the inquiry found that the lack of transparency within the charity’s accounts, in relation to the second agreement entered into with the fundraising agency posed a significant reputational risk to the charity. By not providing past, existing or prospective donors with accurate information about how their donation has been, or was likely to be, spent, the trustees were not being properly accountable to the charity’s supporters. Although some improvements were seen in the accounts for the financial year ending 31 March 2021 there remained a substantial number of accounting and reporting deficiencies including but not limited to a failure to disclose the criteria or measures used to assess success in the reporting period, an explanation of the charity’s grant making policy and the arrangements for setting the pay and remuneration of the charity’s key management personnel. The Commission considers that this lack of transparency amounts to a failure to act in the charity’s best interests and is misconduct and/or mismanagement in the administration of the charity.

Similarly, the order required the trustees to disclose the actual net receipts by the Charity, available to be applied for charitable purposes for the financial year to which the trustees’ annual report relates. The trustees disclosed that during the financial year ending 31 March 2021 that the proportion of total receipts net of direct fees and costs that were available for the charity to spend for charity purposes was 82%. However, this figure excluded costs (e.g. data processing, direct mail appeals, postage and delivery) that should have been attributed to fundraising activity. Therefore, the proportion of total receipts net of direct fees and costs that were available to the Charity to spend for charitable purposes was 44.6% and not 82% as disclosed by the trustees.

The extent to which the charity is solvent and financially viable.

The inquiry found that the agreements between the charity and the fundraising agency meant that the charity was directly liable for the costs of third-party suppliers so if the fundraising agency is unable or unwilling to meet any shortfall the charity’s liability is not limited. Therefore, entering into the second fundraising agreement was not in the charity’s best interests and, in fact, created a significant financial risk for the charity. The accounts (for the financial year ended 31 March 2020 and subsequent financial years) show that the charity was solvent, however the inquiry found that the charity’s unlimited liability under the second agreement poses a risk to the charity’s future solvency. The trustees consider that the fundraising agency has given an express representation that the liabilities are capped. The Commission’s view is that whatever representation was made, it does not form part of the contract or any other contract and it is not clear whether it could be relied upon. This is further evidence of misconduct and/or mismanagement in the administration of the charity.

The extent to which the trustees have complied with their legal duties and the advice, guidance and directions previously issued for the charity by the Commission.

The inquiry found that the current and former trustees (one of whom was in post throughout the period of the first and second inquiries) failed substantially to comply with the Commission’s s84 order made on 4 July 2016, which is misconduct and/or mismanagement in the administration of the charity. Point 5 of the order required that with effect from the charity’s financial year ended 31 March 2016 the charity must clearly disclose in the trustees’ annual report the outline terms of the agreement that had been entered into by the charity with the fundraising agency and the performance under the agreement, to include disclosure of:

• the overall length of the agreement with the fundraising agency and the remaining term of the agreement at the end of the financial year to which the trustees’ annual report related
• the proportion of the total donation receipts that the charity expected to receive from the agreement over its term (i.e. that proportion of total receipts, which was net of remuneration fees and costs, and would have been available for the charity to spend for its general purposes)
• the actual net receipts by the charity, available to be applied for the charity’s general purposes (excluding loans or advances), under the terms of the agreement for the financial year to which the trustees’ annual report related
• in general terms, to set out in the trustees’ annual report the method by which the remuneration to the fundraising agency was calculated under the terms of the agreement between the fundraising agency and the charity
• the estimated remuneration that the fundraising agency would receive under the terms of the agreement between the fundraising agency and the charity over its term. Such estimates were to have been calculated as accurately as was reasonably possible
• the trustees’ assessment of the performance of the agreement with the fundraising agency in the relevant financial year compared with their expectations at the start of the year

The inquiry found that the trustees had also failed to comply with a s84 order dated 14 January 2021 which restated the action required by the trustees in the s84 order made on 4 July 2016. These failures are misconduct and/or mismanagement in the administration of the charity by its trustees.

The inquiry found that the trustees failed to ensure that the charity’s annual financial statements were fully compliant with the relevant version of the Charities’ Statement of Recommended Practice (SORP) in failing to adequately explain the accounting treatment of the material fundraising income and expenditure transactions undertaken pursuant to the agreement(s) in place with the fundraising agency and in failing to disclose related party transactions with the charity’s CEO. In this respect, the trustees also failed to comply with point 6 of the s84 order made on 4 July 2016.

The inquiry found that the trustees did not maintain their own accounting records in respect of the fundraising agency activity, placing reliance instead on records maintained by the fundraising agency that the charity’s accountants admitted to the Commission they had found difficult to understand. Therefore, the trustees failed to maintain accurate and complete records to satisfy the accounting records requirements set out in section 130 of the Act 2011. This failure is misconduct and/or mismanagement in the administration of the charity.

The inquiry found that the trustees submitted two different sets of accounts to the Commission and to Companies House for the financial year ended 31 March 2019. The first version was submitted to the Commission in January 2020 and the revised version was submitted on 17 April 2020. It is the inquiry’s view that both sets of accounts contained significant errors. The inquiry identified that the first set of accounts submitted failed to include a high proportion of the income derived from the fundraising arrangement with the fundraising agency and excluded the entirety of the direct expenditure incurred in the activity which comprised a material part of the charity’s operations. The second (resubmitted) accounts erroneously materially overstated income for the year ended 31 March 2019 and the comparative year ended 31 March 2018.

The inquiry found that neither set of accounts for the financial year ended 31 March 2019 fairly conveyed the extent to which donations were likely to be applied for charitable purposes. Further information should have been included to enable readers to have a better appreciation of the performance of the fundraising agency.

The inquiry found that the accounts and trustees’ annual reports have lacked sufficient transparency concerning the past and expected future performance of the agreement(s) with the fundraising agency. Such transparency would assist the public to understand the proportion of funds raised that were likely to be available for application to the charity’s purposes. In turn this would assist the public to decide whether to donate to the charity.

The extent and adequacy of the trustees’ policies and procedures in relation to the recruitment, appointment, monitoring and management of staff and the extent to which staff performance is reviewed and assessed by the trustees.

The inquiry found no evidence of formal trustee meetings having been held between 1 January 2017 and 1 October 2019, and therefore little opportunity for the scrutiny or assessment by the whole trustee board of the charity’s staff, in particular the CEO, and the charity’s performance during this period. This is of particular concern because the charity was subject to a previous Commission inquiry and was directed to improve its governance arrangements. The failure to have regular and documented trustee meetings amounts to misconduct and/or mismanagement in the administration of the charity.

The inquiry found that the charity had no staff appraisal policy.

Conclusions

The Commission concluded that there had been serious misconduct and/or mismanagement in the administration of the charity by the trustees.

During the first and second inquiries orders dated 4 July 2016 and 21 January 2021 were produced under s84 of the Charities Act 2011. These orders required the trustees to address the weaknesses and issues at the charity, particularly the proportion of income being applied directly for charitable purposes. The proportion of charity income applied for charitable purposes despite some improvement in the most recent financial year, remains low and this continues to be an area of concern and is something the trustees must focus on improving.

Similarly, the trustees had inadequately monitored the performance of the fundraising agency and costs incurred which potentially puts the charity at risk of losses. In addition, the trustees allowed the charity to be exposed to unlimited costs liabilities that posed a risk to the charity’s solvency.

The trustees had not adequately complied with some of the trustees’ legal duties or the advice, guidance and directions issued by the Commission.

Furthermore, the trustees had inadequately monitored the charity’s staff and their performance and the trustees’ identification and monitoring of potential conflicts of interest was inadequate.

Regulatory Action Taken

During the inquiry several directions were made under s47 and s52 of the Act to gather information relevant to the inquiry.

On 14 January 2021, an Order was made under s 84 of the Act, requiring the charity to disclose in the trustees’ annual reports the outline terms of the agreements with the fundraising agency and the performance of the fundraising agency under those agreements. In addition, the Order required the charity to ensure that future annual financial statements and trustees’ reports are fully compliant with the Charities’ Statement of Recommended Practice (SORP).

On 8 December 2021, an Official Warning (‘the OW’) was issued to the charity requiring the charity to fully comply with all the provisions of the section 84 Order made on 14 January 2021. In addition, the OW required the charity trustees to exercise sufficient oversight of the charity’s activities and finances, including the adoption of a financial controls policy, a staff appraisal policy and procedures to provide for regular trustees’ meetings and the recording of trustees’ decisions. The OW also requires the charity to only enter into commercial agreements that are in the charity’s best interests and to implement other changes to improve the governance and accountability of the charity.

Issues for the wider sector

The purpose of this section is to highlight the broader issues arising from the Commission’s assessment of the issues raised publicly that may have relevance for other charities. It is not intended as further comment on the charity in addition to the findings and conclusions set out in the earlier sections of this report but is included because of their wider applicability and interest to the charity sector.

Governance

An effective trustee body acts in the best interests of the charity and its beneficiaries, understands its responsibilities and has systems and policies in place to exercise them properly, with clear and robust reporting procedures and lines of accountability.

Trustees are jointly and equally responsible for the management of their charity. To be effective and to meet their statutory duties as charity trustees they must contribute to the management of the charity and ensure that it is managed in accordance with its governing document and general law. They should be able to devote sufficient time to enable them to play a full role. A charity is entitled to the independent and objective judgment of each of its trustees, acting in the best interests of the charity.

Charity trustees have a general duty to manage their charity’s resources responsibly, reasonably and honestly. This means not exposing their charity’s assets, beneficiaries or reputation to undue risk. It is about exercising sound judgement and then taking decisions that a reasonable body of trustees would do.

Charity trustees are responsible for governing their charity and making decisions about how it should be run. Making decisions is one of the most important parts of the trustees’ role. Trustees can be confident about decision making if they understand their role and responsibilities, know how to make decisions effectively, are ready to be accountable to people with an interest in their charity, and follow the seven principles that the courts have developed for reviewing decisions made by trustees.

Trustees must:

• act within their powers
• act in good faith and only in the interests of the charity
• make sure they are sufficiently informed
• take account of all relevant factors
• ignore any irrelevant factors
• manage conflicts of interest
• make decisions that are within the range of decisions that a reasonable trustee body could make

It is important that charity trustees apply these seven principles when making significant or strategic decisions, such as those affecting the charity’s beneficiaries, assets or future direction.

Conflicts of interest are more likely when there are only a small number of trustees on the board, when trustees are closely related, or when the charity has dealings with organisations in which the trustees have interests. It is vital that trustees avoid becoming involved in situations in which their personal interests may be seen to conflict with their duties as trustees. The trustees should put in place policies and procedures to identify and manage such conflict.

Further guidance and advice on conflicts of interest can be found on GOV.UK.

Financial Controls

Trustees must ensure that their charity has adequate financial controls in place. It is important that the financial activities of charities are properly recorded, and their financial governance is transparent. Charities are accountable to their donors, beneficiaries and the public. Donors to charity are entitled to have confidence that their money is going to legitimate causes and reaches the places that it is intended to, this is key to ensuring public trust and confidence in charities.

The Commission has produced guidance to assist trustees in implementing robust internal financial controls that are appropriate to their charity. Internal Financial Controls for Charities (CC8) is available on the commission’s website. There is also a self-check-list for trustees which has been produced to enable trustees to evaluate their charity’s performance against the legal requirements and good practice recommendations set out in the guidance.

Working with Third Parties

Where a charity is working with a third party to raise funds, compliance with trustee duties means having effective systems in place to keep control of the fundraising, and taking steps to properly protect the charity’s interests, assets and reputation. It also means compliance with relevant legal rules, including those designed to make third party fundraising arrangements transparent to donors, supporters and the public.

Situations that are of particular concern and which should be avoided are those that include one or more of the following characteristics:

• arrangements with a third party fundraiser which bear all the hallmarks of a professional fundraiser arrangement, but which are structured to avoid the legal rules; the fundraiser may be described as an adviser or consultant in the contract even though in reality they are really controlling the solicitation of funds on the charity’s behalf - these arrangements can also mean that it is not clear to the donor that the fundraising is being delivered by, or with the significant involvement of, a third party at a significant cost to the charity
• medium or long term contracts that have very limited termination or adjustment provisions
• arrangements in which the charity only benefits from the arrangement at the very end of the contract term, and where there is the possibility that the charity will not benefit at all
• arrangements where the fees received by, or payments made to third party fundraisers damage public trust and confidence in that charity
• when working with third party fundraisers, trustees must:
  • comply with specific legal requirements which apply when the third-party fundraiser meets the definition of a professional fundraiser or commercial participator; these rules promote transparency, protect potential donors, and give them a fair indication of the extent to which the charity (or charities) will benefit from the fundraising
  • ensure that the arrangement is set up and controlled in a way which is in the best interests of the charity, and which protects its assets and reputation; the Commission’s guidance – Charity fundraising: a guide to trustee duties (CC20) sets out the issues which trustees should consider making sure that the potential benefits of working with the other organisation are appropriately balanced with proper attention to protecting their charity’s interests