1. This is a statement of the results of an inquiry under section 8 of the Charities Act 1993.

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1 The M A Hawe Settlement Registered Charity No Introduction 1. This is a statement of the results of an inquiry under section 8 of the Charities Act : The M A Hawe Settlement ('the Charity') is governed by a declaration of trust dated 21 April The object of the Charity is to benefit such charities and such charitable purposes as the trustees think fit. 3. The settlement is based in Lytham St Anne's and its income in the financial year ending 31 January 2003 was 264,144. Issues 4. The Charity's Annual Return for the financial year ending 31 January 2001 showed that 18,242 was paid to a person connected to the trustees for professional services. It also showed that the Charity had extensive cash reserves amounting to approximately ten times their annual expenditure with no power in the declaration of trust to authorise such accumulation of income. Charities are allowed a certain amount of justifiable reserves but such a large amount of accumulation of income is only permissible if there is a power in a Charity's governing document. 5. Further examination of the Charity's Accounts showed that there was a, "revolving credit facility", in place between it and a company owned and controlled by one of the trustees. The Charity had agreed to allow the company to access 3,000,000 from its Accounts as and when necessary with the agreement of the Charity. 6. In order to address these issues, an Inquiry was opened in June Findings 7. The Charity's trustees are. It was founded by with a gift of shares that provided an initial capital amount. The original governing document did not provide the trustees with a power to accumulate income and therefore the trustees contacted the Commission in 1990 for advice on amending it. The advice provided was that the governing document could be amended to provide a power to allow accumulations of income. The trust deed was subsequently amended on the 4 January 1991 to provide the trustees with a power to accumulate income for a period of twenty one years. Although the trustees were asked to provide a draft copy of the deed of amendment before execution, no document was sent until after the opening of the Inquiry. Closer examination of the power of 1

2 amendment showed that it did tiot provide the trustees with the necessary power to accumulate income and so the validity of the deed of amendment was questioned. 8. The Charity's initial activities were limited to grant giving but as time progressed the trustees wanted to expand its activities. In 1993 the trustees decided to appoint a consultant to help them run the Charity more effectively The consultant they appointed was who had substantial relevant experience and who provided advice and research on matters which in the trustees opinion may have been of interest to the Charity. The trustees decided that the position was not suitable for open competition because of the unique nature of the Charity and its administration and so did not advertise for external applicants. The person concerned no longer works for the settlement but is employed by another charity called Kensington House Trust (KHT) (Registered Charity No ). KHT is funded by the settlement and is one of its trustees. 9. The Accounts for the financial year ending 31 December 1993 showed that the Charity provided a loan of 2,000,000 to a company called which was owned and controlled by. This loan was repaid in 1996 at which time the trustees agreed to provide a loan facility of 3,000,000 to, a company also owned and controlled by. Interest on this was charged at the time at 5% above the bank base rate. 10. The facility allowed MI to access the money whenever needed and in whatever amounts up to 3,000,000 that it required. The authorisation for access to the account was generally given by, although it was an employee of who carried out the transfers. The Charity was administered from the offices of I. which also provided administrative support and assistance. 11. Interest was calculated on the exact amount borrowed and the amount of time it was to be borrowed for. The Charity did not receive interest on an annual basis and did not charge for the establishment of the facility, told the Commission that II had personally guaranteed the loan; as had also invested own money in MI it was formally agreed that, in the event of any financial problems with would waive rights to repayment in favour of the Charity. At the time of the Inquiry the full amount of 3,000,000 had been fully drawn down. 12. A copy of a letter from the Commission dated 26 April 1996 produced by the Charity's professional advisors showed that general advice had been given on the trustee's investment powers. The letter did not state that the advice had been given under Section 29 of the Charities Act 1993 and cannot be considered as the Commission's formal opinion. The initial correspondence from the professional advisors was not provided and so it is not possible to say what information was originally supplied regarding the particular terms and conditions of the proposed loan facility. 2

3 13.The trustees confirmed that the independent professional advice they received did not comment specifically on whether the provision of a loan facility of this kind was in the Charity's best interests, although the trustees insist that it is. The trustees assert that because of the favourable interest received the provision of a loan facility to is vital to the future prosperity of the settlement and therefore KHT, yet the Accounts show cash accumulations amounting to around ten years worth of current operating costs. The Charity could continue to function for the foreseeable future without receiving income from any source. 14. The Charity currently owns the freehold of two properties, one currently being leased to KHT at an annual rent of 25,000. The property leased to KHT was purchased by the settlement in 1993 from M. It was originally intended that it would be demolished and used by for development but the trustees decided it had potential for use by KHT as a hostel for the homeless. The trustees did not commission independent professional advice but relied upon experience as advised the trustees that the property concerned was suitable for the purposes of a hostel for the homeless and the trustees purchased it from M. There is no indication that an excessive price was paid and the premises have proved to be entirely suitable. 15. The Charity also purchased another property from that is currently home to a project run by KHT. The trustees of KHT felt that this property was ideal for their purposes and approached the Charity to purchase the property from. proposed to develop the property for commercial purposes but were prepared to sell it to the Charity. The trustees again used to assess the suitability of the property before purchase. The trustees received no independent professional advice on the purchase. Once the Charity acquired the freehold of the property it was then transferred to KHT to develop it into the current project. There is again no indication that an excessive price was paid and the property is entirely suitable. 16. The Commission was of the opinion that the Charity's financial records lacked sufficient transparency, for example, the income and expenditure details could not be clearly identified. It operated various accounts without clear explanations of why or what they were for. The staff operating these accounts seemed to indicate that the lack of clarity was a result of the often complex funding arrangements with KHT. 17. The minutes of the Charity's trustee meetings do not show any discussion about these project bids or the rationale behind the grants allocated. To assess where the money has gone it is necessary to also examine KHT's accounts and its trustee minutes. It is extremely difficult to understand the expenditure of the Charity without also looking at the records of KHT. 18. The minutes also show very little discussion between the trustees regarding the furthering of its objects through its activities. The commonality of trusteeship between the two charities means many discussions overlap and decisions taken often involve both charities and their trustees. It is impossible to identify the work of the settlement without also looking at the work carried out by KHT. However the Charity is properly funding the work of KHT

4 1 0. The financial support pi uvided by the Charity enables KHT to provide a variety ot services to beneficiaries that include a hostel, outdoor activity trips for children, provision of respite breaks for the families of children who have special needs and a crisis grant line. Without the financial support provided by the Charity, KHT would be unable to carry out these activities. 20. There is no evidence that the trustees have acted in bad faith or caused any loss to the Charity by their actions. It is in a healthy financial position because of the decisions taken by the trustees and has a secure future. Outcome of the Inquiry 21. Since the Inquiry was opened, the trustees have received professional advice on the possibility of providing a loan to I. as well as advice on general governance and administration and have been given a list of recommendations to act upon. The trustees acknowledge that the settlement cannot provide an overdraft facility to and have ceased this provision. 22. Although the power to accumulate income is invalid, the Commission does not consider it necessary for the trustees to seek to spend all of the accumulations immediately but has encouraged the trustees to consider various options to rectify this irregularity as a matter or urgency. 23. The trustees are actively seeking to appoint independent trustees to add to their knowledge base, expand their experience and skills and to help address and manage the potential conflicts of interest 24. The trustees acknowledge that, although the Charity does not rely upon public donations or other external funding, as a registered charity, transparency and accountability are vital. They have agreed to be more diligent in recording the reasons for their decisions and the development of the Charity's policy and strategy. 25. Although there is a close relationship between the two charities the trustees understand that they must be totally separate and autonomous. They will endeavour to ensure that the settlement can account for itself without reference to the activities of KHT. 26. The Inquiry was closed on 12 January The Commission will contact the trustees in six to twelve months to assess their progress on the recommendations proposed. 4

5 Wider Lessons 28. Founders of charities often appoint family members as co-trustees and look to play an active part in the administration of the charity. The assets settled on trust for the charity may be in the form of shares in a family business or property previously held for the benefit of the family and its business interests or has ongoing connections to them. Familiarity with the trust assets, allied to close family relationships, often leads to informality in the administration and governance of the charity and a failure to adequately distance the affairs of the charity from those of the family and its business interests. Conflicts of interest are often the end result. 29. There can, of course, be potential conflict issues simply by virtue of trustees being closely related but they are not inevitable or unavoidable. They are likely to be inevitable when there are only a small number of trustees, all of whom are closely related and the charity concerned has frequent and financially significant dealings with businesses in which the trustees have interests. Trustees are not expected to balance the competing interests with a view to reaching a happy medium, which leaves all parties happy. They are however expected to act only in the best interests of the charity and to step back from or avoid any situation where a conflict exists or is likely to arise, even if this means, for example, that additional disinterested trustees are appointed or that the affected trustees resign. 30. Trustees must obtain proper advice before exercising their investment powers. This is generally the advice of a person who is reasonably believed by the trustees to be qualified to give it by his ability in and practical experience of financial and other matters relating to the investment which it is proposed to make or retain. The adviser may or may not be another trustee. If one or more of the trustees of the charity can satisfy the other trustees of their financial ability and experience, then they may provide the advice. Any trustee who proposes to do so, however, needs to bear in mind that he will be assuming a specific responsibility for the quality of the advice which he offers to the other trustees. That trustee may, like any other adviser, incur a liability to the trust, if loss results from negligently given advice. The trustee advising would need to be free of any conflicts of interest in relation to any part of the advice given. 31. The trustees who receive advice from a fellow trustee also have a responsibility here. They need to consider objectively whether or not it is, in fact, in the charity's interests to take advice from a fellow trustee rather than from an individual or firm who is not connected with the charity. They may feel that an adviser who is independent from the charity may more easily be held to account for the adverse consequences of negligently given advice. 5