Charity watchdog criticises trustees over high risk investment.
On 11 February 2011 the Commission opened a statutory inquiry into the charity after identifying concerns that the charity’s accounts referred to investments of £3 million being made with one of the then trustees. The Commission liaised with the then Financial Services Authority and established that the individual was not authorised to carry out regulated activities (such as dealing in or managing investments). This raised serious concerns as the charity had made substantial investments through the individual which appeared to be speculative and high risk in nature - see endnote 1. The Commission used its legal powers to direct the charity to stop any further investments - see endnote 2.
The Commission’s inquiry established that the trustees who were in place at the time had invested a total of £5 million of the charity’s funds, which subsequently resulted in a net loss of £3.9 million to the charity.
The Commission appointed an interim manager on 31 January 2014 to review decision making in relation to the investments, establish whether there was any potential personal liability and, if so, whether any restitution was appropriate and in the charity’s best interests.
The Commission’s inquiry report published today concluded that the trustees who made the investment were responsible for mismanagement in the administration of the charity.
The Commission’s conclusions include that the trustees who were in place at the time of the investment failed to:
exercise sufficient care when making the decisions to invest £5 million of the charity’s funds through the trustee’s investment scheme
ensure they were sufficiently informed and take into account all the relevant factors - they could not show that their decisions were based on sufficient and appropriate evidence particularly as they did not seek proper independent advice on a high risk, high value investment scheme
manage conflicts of interest when making the decision to invest - there was too much reliance on the expertise of the trustee when he was personally interested and conflicted in the decision to invest charity funds through the trustee’s investment scheme
The Commission concluded that a prudent person acting with due care would have been concerned that the promise of a fixed rate of return of 55% per annum for the investment was an unusually high rate and likely not to be achievable on a long-term basis.
The trustees who took these decisions resigned at various dates between 2009 and 2014 and are no longer trustees.
The trustees now in place agree that the former trustees’ decision to invest was not a prudent or reasonable one. None of the current trustees were involved in the decision making regarding the investments with the now ex-trustee. Under the Commission’s scrutiny, the now trustees acted in the best interests of the charity in pursuing restitution and agreed a settlement to recover some of the losses the charity has suffered. The current trustees have ensured that the charity now employs an investment manager and have adopted a new investment policy.
Michelle Russell, Director of Investigations, Monitoring and Enforcement at the Charity Commission, said:
This case is a reminder that trustees must ensure that they do not permit any personal associations to interfere inappropriately with their judgement as charity trustees and that any decisions they make are in the best interests of their charity. When trustees are considering a high risk decision, particularly one involving significant sums of money, they should take independent professional advice from properly qualified persons to ensure that they are not exposing the charity to significant risk. Donors and beneficiaries have a right to expect trustees to take appropriate steps to protect property of the charity.
We make clear in our policy and guidance that where trustees are reckless and make poor decisions that are not in the best interests of the charity and result in significant losses, the Commission will ensure that they are held to account. It was appropriate that in this case the charity pursued restitution to recover or repay the losses against the trustees who made these decisions.
For further information on the Commission’s policy on restitution and recovery of charitable funds lost to charity in breach of trust see the restitution policy.
Trustees are expected to be aware of their obligations and responsibilities, our guidance on being a trustee can be found in The essential trustee: what you need to know, what you need to do (CC3) and It’s your decision: charity trustees and decision making (CC27) both of which are on GOV.UK.
The full report is available on GOV.UK.
Notes to editors
- The inquiry issued an order on 16 February 2011 under the then section 18 (1) (vi) of the Charities Act 1993 (now section 76 (3) (f) of the Charities Act 2011) to prevent the trustees from entering into any investment of the charity’s property without the written approval of the Commission. The order was discharged on 29 July 2011 after the trustee with whom the funds had been invested had resigned, and the FSA had obtained a restraining injunction and freezing order on 11 February 2011 in civil proceedings in which the FSA also sought a restitution order.
- The inquiry appointed an interim manager on 31 January 2014 under section 76 (3) (g) of the Charities Act 2011 to work alongside the existing trustees of the charity so that the trustees continued to run the religious and other activities of the charity on a day to day basis.
- The Charity Commission is the independent regulator of charities in England and Wales. To find out more about our work, see our annual report.
- Search for charities on our online register.
- Details of how the Commission reports on its regulatory work can be found on GOV.UK.
- Relevant functions of the Financial Services Authority are now carried out by the Financial Conduct Authority.
- See Notes to Editors.
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Published: 14 December 2016
From: The Charity Commission