Testing the Case Against Independent Charities Regulation

The Policy & Research Manager with Philanthropy Australia, Krystian Seibert analyses the issues around independent charity regulation.

In a recently published Centre for Independent Studies paper (CIS paper), the argument is made for the speedy abolition of the relatively new Australian Charities and Not-for-profits Commission (ACNC).

The central point of the paper seems to be that the ‘state-led’ approach to regulation of charities, characterised by independent charities commissions such as the ACNC, is a failed model. The alternative ‘non-state’ model is focused on the growth of ‘Charity Navigator’ style evaluation websites, combined with a reliance on the role of philanthropy to provide an incentive for accountability and good governance.

The CIS paper is an interesting read and injects some new points into the debate about charities regulation, both in Australia and beyond. However, it is based upon a number of problematic propositions which need further consideration. It is important these propositions are appropriately reflected upon, so that when the debate about the future of charities regulation heats up in the coming months, we are all armed with the facts.

The Independent Charities Regulation Model

The CIS paper argues that independent charities regulation is a failed model, and that consequently it’s on its way out as a preferred method of charities regulation. However international trends indicate otherwise.

In England and Wales, there is an independent Charities Commission. Scotland and Northern Ireland both have independent charity regulators too. Notably, in recent months Ireland announced that it would be setting up a new independent charities commission as a matter of priority.

Even in Canada, where their Canadian Revenue Agency regulates charities, there has been a strong push for reform in recent years.

New Zealand is cited in the CIS paper as an example of a jurisdiction ‘abolishing’ its independent Charities Commission. But abolishing is not the correct term to use – what really happened is the transplanting of their Commission’s functions into the Department of Internal Affairs, with an independent board determining charitable status.

The New Zealand Government made a deliberate choice to maintain a dedicated regulatory framework for charities, and not to return responsibility for determining the charitable status of organisations to their revenue collection agency. It also emphasised the importance of an independent process for determining charitable status during Parliamentary debates on the relevant legislation.

However the current proposal in Australia is to do exactly what New Zealand decided not to do, with the Australian Taxation Office (ATO) to take charge of determining charitable status and registering charities if the ACNC is abolished.

This would re-create a conflict of interest, between the roles of determining charitable status and the benefits this then entails in the form of tax concessions. In addition, although determining charitable status provides access to tax concessions, it’s different to administering taxation law and it’s a task that revenue collection agencies are not necessarily the best placed to undertake.

To emphasise this point, a high level Committee appointed by the Howard Government to undertake the Inquiry into the Definition of Charities and Related Organisations felt so strongly about this issue that it concluded that as a matter of principle the charitable status of an organisation should stand independently of the taxation concessions that may be linked to it. They therefore supported the establishment of an independent body to determine the charitable status of organisations.

Even the ATO’s own submission to that Inquiry supported an independent, objective decision-making process for determining charitable status, pointing to the then United Kingdom’s Charities Commission as an example.

The ‘Charity Navigator’ Approach

Charity Navigator and similar evaluation websites such as Guidestar are an interesting development, and they are particularly prominent in the United States. As the CIS paper points out, they are also establishing themselves in other countries around the world and in the opinion of the CIS paper, they represent a non-state alternative to independent regulation by an organisation like the ACNC.

In the United States, these websites use data sourced from the Inland Revenue Service (to which charities must submit very detailed annual returns), making the data more accessible and using it to ‘rate’ charities based on particular metrics.

Some critics of the Charity Navigator approach, see them as purveyors of ‘league tables’ – where particular focus is paid to overheads such as administration and fundraising.

The level of a charity’s overheads is a poor measure of a charity’s impact, and impact is really what we should be focused on. To their credit, this is something that Charity Navigator and similar websites have themselves recognised, going so far as to write a letter to those who use their websites.

But what this also shows is that the approach of non-state regulators such as Charity Navigator is not beyond flaws – they can make mistakes too and the information they provide can lead donors to focus on the wrong things and make the wrong conclusions. This can have harmful impacts. Why else would they write such a strongly worded letter to the members of public who have been using their websites?

This does raise a question about why the CIS paper is arguing that independent charities regulation is a flawed model basically because it’s not perfect (and recent experience in England and Wales does show that it’s not perfect), but as an alternative it advocates a non-state form of regulation which has shown to be flawed as well?

Charity Navigator and other websites are working to improve their approach. But the question still needs to be asked as to whether an independent charities regulator that collects verified information about charities, is a necessary prerequisite to the effectiveness of Charity Navigator and similar evaluation websites. Or in other words, whether independent charities regulation and charity evaluation websites are not an alternative to each other but rather are complimentary.

Interestingly, Charity Navigator itself actually advocates establishing an ACNC like body in the United States. Again, to it’s credit, it can certainly see it’s own limitations.

Philanthropy and Good Regulation

The CIS paper rightly points out the rise of ‘high-wealth donors’ following the introduction of more effective vehicles to support their giving in 2001, namely Prescribed Private Funds (now referred to as a Private Ancillary Funds or more simply as ‘PAFs’).

The introduction of PAFs has had a major impact, and as part of a broader package of reforms implemented by the Howard Government around the same time, they represent what are probably the most significant policy changes designed to support philanthropy in Australia’s history.

The CIS paper argues that wealthy donors put significant effort into verifying the financial and operational soundness of charities, and that they have the time, resources and influence to implement additional oversight. The argument flowing from this is that the incentives from such non-state oversight mean that independent charities regulation is less necessary.

It is true that funders such as philanthropists and PAF trustees may put significant effort into examining the financial and governance practices of charities. But this is still a big generalisation, because the extent of the due diligence amongst philanthropists and PAF trustees will vary.

For example, according to JB Were 7% of PAF distributions in 2011 were to Public Ancillary Funds (which are similar to PAFs but with a public fundraising obligation), something that is not permitted. This may indicate that some PAFs do not properly verify the nature of the entity to whom they are donating.

This is understandable because PAFs tend to be quite lean operations, focused on giving and its impact. This means that they actually don’t always have the time, resources and influence to implement the oversight the CIS paper envisages.

Indeed the benefits of having an independent charities regulator, including the minimum level of assurance about the finances and governance of charities that it provides, but critically also the information that makes it available, has significant benefits for funders.

In the United States, funders have been recommended to check information about organisations they support that is made available through the Internal Revenue Service. This is in part because problems have been identified about the openness with which funders and those they support can talk about finances. The incentives don’t seem to be working that well there.

Perhaps all this is a reason why the Pro Bono Australia 2013 Not-for-profit Election Survey found that across the NFP sector, funders have the strongest preference for a national regulator.

The CIS paper also points out that regulation has the potential to stifle the growth of philanthropy and the establishment of new PAFs – which is true.

But it proceeds to attribute a sharp decline in the establishment of new PAFs in 2008 and 2009 entirely to reforms which initially proposed to, amongst other things, considerably increase the required annual distribution from a PAF.

It’s worth noting that whilst these initial proposals certainly did have an impact, this leaves out a big part of the story.

As pointed out by JB Were and the Australian Centre for Philanthropy and Non-profit Studies, the Global Financial Crisis was a major factor behind the decrease in PAFs being established during that period and the decrease in donations into PAFs. It’s important to tell the whole story.

A Final Point – The Fundamental Importance of Good Data

It is worth noting that the only reason we can have a discussion about PAFs and how poorly designed regulations and global economic conditions can impact upon them, is because PAFs are required to submit annual returns to the ATO. It’s not something that is optional.

We have good information about PAFs, which means we can discuss the impacts of policy changes and other factors on their use as a vehicle for giving. We have data about their growth as a vehicle for philanthropy, and therefore have an evidence base when participating in policy debates and promoting policy settings that support philanthropy.

However data on the broader NFP sector, including philanthropy, is patchy and tends to be outdated. Often reference will be made back to old reports or surveys – because that’s all we have available.

One of the benefits of the ACNC’s ‘Annual Information Statement’ is that for the first time, there is a possibility that we will have aggregated NFP sector wide data. This would be a crucial resource.

Whatever happens to the ACNC, we certainly need a more effective means of data collection on the NFP sector. This will be critical to supporting the growth of philanthropy and the broader NFP sector going forward.

About the author: Krystian Seibert is the Policy & Research Manager with Philanthropy Australia and a former policy advisor in the previous Federal Labor Government. He tweets @KSeibertAu