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Commission issues alert to charities engaged in commercial activities

Regulatory alert issued today on commercial partnerships and agreements with charities and their trading subsidiaries.

The Charity Commission, the independent regulator of charities in England and Wales, is reminding trustees of charities which have or intend to enter into partnerships or agreements with commercial organisations, either directly or through a trading subsidiary, of the relevant legal duties and responsibilities.

The commission is aware of many such agreements between charities, their subsidiaries and commercial organisations and these are not in themselves cause for concern. Working with a company may bring many benefits for a charity including raising funds and increasing awareness of the cause.

However a charity’s name and reputation are valuable assets which trustees must protect. Trustees must have effective oversight of any partnership or agreement with commercial organisations and be able to show their decisions are made in the best interests of the charity and they have acted responsibly.

This alert is to remind trustees of their duties and to set out to trustees our expectations as the regulator. Recent media reporting of charity partnerships with commercial organisations have highlighted the potential for such arrangements to affect public trust and confidence and damage a charity’s reputation.

The commission therefore expects that trustees review any current arrangements to satisfy themselves they remain in the charity’s best interest.

Trustees must be clear about how entering into an agreement with a commercial organisation will help them achieve their charitable aims.

The commission expects trustees to:

  • be aware of any agreements or partnerships between their charity and a commercial organisation
  • ensure such arrangements are clearly agreed in writing, conform to legal requirements relating to commercial participators where these apply, seek and consider professional advice where appropriate to ensure the charity is protected
  • have appropriate processes for oversight and control of commercial partnerships and be able to demonstrate these are in place and effective
  • ensure that the commercial organisation will confirm to the requirements of other regulators, in particular competition law
  • carry out appropriate checks on a commercial organisation before entering into an agreement and identify and manage any conflicts of interest
  • be clear that any partnership is in the best interests of the charity and have appropriate processes to review partnerships to ensure they remain in the best interests of the charity throughout their duration
  • consider the risks and benefits to the charity’s name and reputation of a commercial partnership and ensure that a charity’s name and assets are valued and protected
  • make sure that where products or services are sold through or in the name of the charity, the nature of the commercial partnership and the fee or commission received by the charity is clear and transparent

Charities with trading subsidiaries

A trading subsidiary is a company, owned and controlled by one or more charities, usually to generate income for the parent charity. Some commercial partnerships are with a charity’s trading subsidiary and not with the parent charity. However, the use of the charity’s name and the extent to which it can be used in any marketing or other commercial exercise must be both formally agreed with and monitored by trustees.

Trustees must routinely monitor the performance of all trading subsidiaries, and of the parent charity’s investments in them, to ensure the good and proper use of the charity’s assets. They must be prepared to assert the rights of the parent charity as shareholder and must always put the interests of the parent charity first. The directors of the trading subsidiary are responsible for its management, but other major decisions are for the trustees, as representatives of the parent charity.

The commission expects the trustees of charities with a trading subsidiary to:

  • monitor the risks to the charity’s name and reputation of commercial partnerships and agreements with the trading subsidiary as part of their monitoring of its performance
  • act to protect the parent charity if any arrangement is not or is no longer in the charity’s best interests

Trustees have a responsibility to intervene in the affairs of the subsidiary company in the manner indicated if they are dissatisfied with the way the partnership or agreement with the commercial body is being implemented or serious issues affecting the reputation of the charity arise.

Failure to adhere to the requirements outlined in this alert as well as the relevant guidance and legislation could result in regulatory action.