Britain’s New Rules

After 400 years, laws governing nonprofit groups get a long-anticipated overhaul

British nonprofit leaders have griped for years, without great exaggeration, that they are hemmed

in by legal rules that were enacted in 1597, during Queen Elizabeth I’s reign.

No one listened — until a major fund-raising scandal damaged the credibility of charities in Britain, and public outcry forced the government to pass a major overhaul last month.

The result was Britain’s new Charities Act, which will be put into effect gradually over the next three years. It doesn’t dismantle the centuries-old nonprofit framework, but it does sweep away some of the dustier passages.

For one, charities should find it easier to raise money and police themselves. The law also restructures the relationship between nonprofit organizations in Britain — which together raise $38-billion a year — and their governing body, the Charity Commission. It even redefines “charity”: Before, only groups that aided the poor or advanced religion or education were considered legitimate charities. Now, environmental, medical, and myriad other groups will share the title, just as they do in the United States.

And instead of groups being automatically granted charitable status for good intentions, as was the case previously, the onus will be on them to prove they benefit the public. The new rules apply not just to groups based in Britain, but those based in the United States and other countries that raise money from British residents.

Changing Times

Demands for accountability may sound familiar to groups in the United States, where federal and state officials have called for tighter government regulations on nonprofit organizations and donors.

However, Britain’s new law may lead to less government oversight — what many charity leaders in the United States have sought.

Policy makers in the United States “would do well to watch this closely,” says Diana Aviv, president of Independent Sector, a Washington coalition of nonprofit groups that wants charities to be given more responsibility to police themselves. She said it was also significant that the law was not rushed, but took several years of deliberation before it was enacted.

Britain’s example will also test how well an old system can adapt to modern times. Despite disagreement among scholars, nonprofit leaders, and government officials about the bill’s long-term impact, they remained unanimous on one point: The world had changed, and the rules governing charities needed updating to reflect new financial and social realities — and to close loopholes.

“People were driving a set of horses through the whole legislation,” says Stephen Lee, director of Henley Management College’s Centre for Voluntary Sector Management, in Henley-on-Thames, England. “This bill has been a very long time in the coming. The old distinctions between profit, nonprofit, and public are merging very quickly.”

Greater Self-Regulation

While an overhaul of nonprofit laws was first introduced in Parliament in 2002, it took public outrage over a scofflaw for nonprofit groups to get the bill they so strongly desired.

A year after the bill was introduced, a fund raiser who had been hired to solicit donations on behalf of Breast Cancer Care Scotland was caught embezzling more than $860,000 from the organization. After the embezzlement was uncovered, donors were angered by news reports that only 10 percent of the research dollars raised by the charity actually went to research.

The fund raiser, Tony Freeman, was sentenced to 18 months in jail and ordered to pay back more than $400,000.

The anger he provoked prodded efforts to change charity laws, because potential donors and other members of the public realized they didn’t always know how charities spent their money.

Last year, in a prelude to passage of the major charity measure, Parliament forced organizations to adopt uniform accounting practices, making it easier for the public to scrutinize once-opaque financial statements.

“Up to that point, very few charities had to stick their heads above the parapet,” says Andrew P. Watt, vice president for international development at the Association of Fundraising Professionals, in Alexandria, Va. Financially, “nobody could prove what anybody was talking about.”

The Charities Act goes even further to demand accountability. Indeed, both the government and nonprofit leaders cited improving public image as a major motivation for the act. While in the United States lawmakers have sought to achieve greater accountability by proposing tighter controls on nonprofit groups, Britain will grant its charities more autonomy. Philanthropic groups, the thinking goes, have to be seen as able to police themselves. And the new accounting rules passed last year have made the government feel safer about ceding authority.

“They’ve recognized the importance of genuine self-regulation, and defensible self-regulation,” says Walter J. Sczudlo, general counsel at the Association of Fundraising Professionals.

He says that is a contrast to the United States, where lawmakers and regulators have suggested that new rules are needed to keep charities in line. “I wouldn’t say U.S. regulators are not interested in those same things,” he says, “but there seems to be much more of an antagonistic approach.”

The government body that regulates nonprofit groups in Britain is very different from the Internal Revenue Service in the United States, which mainly monitors charity finances and political activity.

British charities, by contrast, have a cabinet office, the Charity Commission, that supports and encourages their growth at the same time that it regulates them. For example, it helps groups in their infancy select proper names: Don’t pick one too confusingly similar to another charity, it suggests on its “Guidance for Charities” Web page.

With the new law, British charities will be freed from a number of hassles, the Charity Commission says. Organizations will no longer have to register with two separate government offices. The bill also makes solicitation statutes uniform across the country, issuing one license per organization and eliminating the headache of applying for licenses in scores of local jurisdictions.

The changes should make it easier to reach donors. That’s a mixed blessing, though, since the public was already feeling hassled, Mr. Lee, the Henley College scholar, says.

He says pedestrians have been especially annoyed with charities that post solicitors on sidewalks. British newspapers have repeatedly run columns bemoaning the practice, and “chugger” — for “charity mugger” — has become common slang for a face-to-face fund raiser (The Chronicle, September 28).

Does Society Benefit?

The most significant portions of the Charities Act, however, are not administrative but philosophical.

“The real debate is over the public-benefits test,” says Megan J. Pacey, director of policy at the Institute of Fundraising, a trade group in London.

In Britain, charities have always been classified as groups that benefit the queen’s people at large.

That distinction led some liberal members of Parliament to advocate stripping certain religious organizations and Britain’s private schools of charitable status, on the grounds that they don’t serve a large segment of the population. (Ms. Pacey sums up this position as, “the fact you can afford to go to private school in the first place proves you’re not a charity case.”)

The debate extends more widely than scrutinizing individual groups, though. Part of the British public’s distrust of charities stems from confusion about what a charity is. For example, British citizens have long assumed that Greenpeace, Amnesty International, and art museums all qualify, since they are, as Ms. Pacey says, run by “people who work in a charitable way.”

But they are not charities in Britain. Despite the exemptions such groups get from some taxes, none of those groups meet the traditional criteria for charities because their primary purpose is not to advance education or religion, or to serve the poor.

That old, limited taxonomy confuses Britons, and many citizens only donate to what they believe are “official” charities, since the designation has a certain cachet.

So, to bring the law in line with public perception, the Charities Bill expands the number of possible missions for charities to 12, adding such categories as health, community development, the arts, civil rights, and the environment to the traditional missions of education, religion, and poverty-fighting.

Managing and monitoring these new groups, the Charity Commission said, could cost the government more than $20-million per year, in addition to one-time transition costs of up to $17-million spread over three years.

Documenting Results

While organizations working on a broad range of missions are now eligible to become charities, all groups must clear another hurdle.

Instead of the commission presuming that charities do good works, each one now must prove it by submitting paperwork detailing its accomplishments. This provision affects U.S. charities working overseas, too. American groups interested in raising small amounts of money need only abide by new licensing requirements, but any group registered with the commission — and many more will have to be, given the expanded definition of “charity” — must prove its contributions to British society.

Most organizations will pass — the Charity Commission has said it is not looking for excuses to boot them. But the new rules mean charities must spend more time to prove their value to society — up to 10 percent more time annually, estimates Mr. Lee, who says the act “will extend regulation and therefore bureaucracy. You can’t have one without the other.”

In other words, the Charities Act simultaneously relieves organizations of some paperwork (registration forms) and lades them with more (compliance duties). And the burden will fall most heavily on small charities, say observers.

“A university foundation or a big health-care system is not going to like the new administrative burdens,” says Mr. Sczudlo. “But a small organization might not even know what the burdens are, much less how to comply with them.”

The bill has increased the minimum size of groups that must register with the Charities Commission, from organizations that raise $1,900 annually to those that take in $9,500 a year.

But 140,000 of the 180,000 official charities in Britain still have to comply, and most of those are small.

According to Charity Commission statistics, money is increasingly concentrated among the top tier of charities. Fewer than 5,000 groups have annual revenues exceeding $1.9-million.

Mr. Watt, of the Association of Fundraising Professionals, says he worries that smaller charities would be at a disadvantage adjusting to the new rules. Nevertheless, he says, most are “prepared to go through it, because some people only give to registered charities.”

In the long run, he believes, the new rules would benefit all philanthropic groups. In the meantime, “the process of change will be painful,” he allows. “It always wastes what seems like huge amounts of money.”

Giving the Watchdog Teeth

Because the government’s Charity Commission acts as a sort of parent to British nonprofit organizations, the relationship can grow awkward as charities age.

Since nonprofit groups perceive the commission as its overseer, says Pete G. Moorey, parliamentary manager at the National Council for Voluntary Organisations, in London, “there’s a lack of clarity about what is regulation and what is advice.”

Not that there are dire punishments for ignoring house rules. The last attempt to revise British charity law, made in 1993, was “very poorly policed,” says Mr. Lee, who says that the commission has prosecuted wrongdoers only sporadically and reluctantly.

M. Ben Harrison, a policy adviser in the Charity Commission’s development unit, said his office doesn’t prosecute violations frequently because it has a different attitude about how to bring errant charities into line.

In an e-mail message to The Chronicle, Mr. Harrison said that “the Charity Commission generally seeks administrative means for encouraging compliance, such as naming and shaming charities… rather than seeking criminal prosecution.”

In theory, however, the Charities Act will allow the commission to lay down the law in the future: It restructures the commission to cut back its advisory duties and beef up its enforcement duties, including ensuring that charities file government financial reports on time, tardiness in filing the forms being an endemic problem in Britain.

And charities support more stringent enforcement. Among nonprofit groups, Mr. Moorey says, there was a feeling that “the regulatory role is so important, it has to be their priority, so public trust and confidence is upheld.”

‘Social Enterprise’

Over all, the revamping of the British charity system is too complicated to make easy predictions about its long-term impact.

In some ways, the act will reduce bureaucracy, in other ways impose more. Some statutes will expand the number of official charities, others will strike thousands off the Charities Commission’s rolls.

And technically, the act covers only England and Wales; Scotland’s version of the bill, passed in 2005, is slightly different, and Northern Ireland’s is just being drafted.

Moreover, the idea of purely charitable groups is becoming more complex: For example, the commission gives the charity label to groups that charge fees for their services.

And it’s tough to explain why British soccer clubs would be considered charities, though some qualify under the new law.

Ms. Pacey called such ambiguous groups “social enterprise” organizations, and said their influence could mold British charities into something more like American nonprofit groups.

“You can be a nonprofit and make massive amounts of money,” she says. “The next challenge for us will be to distinguish what is a charity and what is a social enterprise.”