The regulator has drawn on a range of data and intelligence available to it, including information from annual returns, serious incident reports and casework, in publishing its first ever annual Charity Sector Risk Assessment, which identifies systemic risks that may impact on charities’ ability to deliver against their aims, or on public trust in the sector – seen through the eyes of the regulator.
The Commission is encouraging charities to consider the issues identified as they review their charities’ own risks – and signposts relevant guidance for trustees.
Financial pressures
The assessment highlights the impact of financial pressures on the sector. Charities are experiencing multiple challenges, including increased demand for services, the rising cost of employing staff and the impact of inflation on the value of funding. This echoes research, published earlier this year, showing that the proportion of people receiving food, medical or financial support from charities has tripled from 3% to 9% over the past 5 years.
While the sector is diverse and these pressures impact on charities in very different ways, depending on their size and the nature of their operations, overall, the Commission says that 22.5% of charities reported an operating deficit in their 2023 Annual Return, up from 20% in 2022. The regulator stresses that running a deficit does not mean a charity is insolvent, but that this finding continues a growing trend of charities drawing on reserves to bridge the gap between income and expenditure.
Risks to public benefit
The Commission’s report also spotlights risks to public benefit arising from the misuse of charities. A small number of charities are being deliberately targeted by bad actors seeking private benefit, in some cases with attempts to set up a charity for the primary purpose of gaining unlawful benefit. This might include the misuse of charity property, unauthorised payments to private individuals, false Gift Aid claims and complex methods of tax avoidance or evasion.
The regulator stresses that the number of such incidents is small compared to the size of the sector but that the impact on public trust of even one case can be significant, and thus presents a systemic risk for the sector, and the Commission.
Wider risks
While risks to financial resilience and public benefit are “spotlighted” in the report as being among the most significant issues, the report details a number of wider concerns, including around governance, safeguarding, fraud, cyber threats, and the impact of social tensions, geopolitical turbulence, and hostile states on the work of charities.
The report draws on information and intelligence from the 2023 Annual Return, and from casework data for the financial year 2023-4.
Mitigation and regulatory action
As well as explaining the nature and potential risks facing charities, the Commission’s report sets out steps trustees can take to mitigate the likelihood and the potential impact of threats facing their charities. The Commission also continues to adapt its own approach in response to these risks through the lens of its specific regulatory remit.
In the context of risks around financial resilience, the Commission highlights the importance of careful forecasting and planning and timely responses to any early warning signs. The regulator has a range of guidance aimed at helping trustees understand and fulfil their legal duties around financial stewardship, and this Autumn is launching a new awareness campaign to highlight its financial guidance for charities.
The Commission as regulator has set out its approach to risk and assessing concerns in charities, in its recently revised guidance Raising a concern with the Charity Commission.
Chair of the Charity Commission, Mark Simms OBE, said:
Read in isolation, our risk assessment paints a picture of considerable, cumulative challenges facing the charity sector at this time. For many individual charities, the risks of financial sustainability are indeed grave, and some charities are facing difficult choices, including to restructure operations or services.
But it’s important to put this report into context. The charity sector overall has demonstrated incredible resilience over many decades, and indeed centuries, adapting and adjusting over time to the most serious challenges and enormous social, political and economic change.
I’m hopeful and confident that the sector will continue to weather the storms of our times. However, individual charities must be clear eyed about the challenges they face, and take steps to mitigate these.
In publishing this assessment and sharing more insights from our casework and intelligence, we hope to help trustees steward their charities through challenging times.
The Charity Sector Risk Assessment is published in full on GOV.UK.
Ends
Notes to editors
- The Charity Commission is the independent, non-ministerial government department that registers and regulates charities in England and Wales. Its ambition is to be an expert regulator that is fair, balanced, and independent so that charity can thrive. This ambition will help to create and sustain an environment where charities further build public trust and ultimately fulfil their essential role in enhancing lives and strengthening society. Read further information about what the Commission does.
- The Commission publishes a wide range of guidance for trustees, including accessible 5-minute guides designed to provide trustees with an overview of their duties, including on Managing charity finances and Making decisions in a charity.
