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What is a conflict of interest and how can it arise?

According to new guidance introduced by the Charity Commission on 15 May 2014, a conflict arises in “any situation in which a trustee’s personal interests or loyalties could, or could be seen to, prevent them from making a decision only in the best interests of the charity”.

Typical examples of when a conflict could arise include:

  • A decision is made by a trustee who makes a personal financial gain or benefit from it.
  • A trustee who sits on the board of a number of charities, all of which are applying for the same grant.

Why has new guidance been introduced?

The introduction of the guidance follows the Charity Commission’s completion of its nine investigations last year, all of which were found to have contained conflicts of interest.

The Chief Executive of the Charity Commission, Sam Younger, provided a damning verdict on the current prevalence of conflicts of interest occurring within charities:

“It is unacceptable that improperly handled conflicts of interest are so pervasive in our compliance work and all too often we are seeing serious weaknesses in charities’ knowledge and ability to handle the issue”.

What does the new guidance hope to achieve?

The publication of the new guidance, in addition to an in-depth summary and explanatory paper setting out the legal underpinning of the guidance, have been produced in the hope that charities will reduce their exposure to conflicts of interest and will be better equipped for when they arise.

To achieve this, the Charity Commission has introduced a three-stage method which all charities must observe. It involves:

Identifying potential conflicts.

  • Preventing conflicts from affecting any decision making.
  • Recording any conflicts and how they are dealt with.

Why should trustees of charities care about conflicts of interest?

Trustees have a legal duty to act in their charity’s best interests when making decisions. The consequences for trustees that fail to adhere to their legal duty can be rigorous and may involve:

A transfer of property made by the charity being set aside.

  • The trustee being held personally liable to compensate the charity for any loss arising from a result of the breach.
  • The trustee being required to pay back to the charity any financial benefit resulting from the breach.

How do charities cooperate with the new guidance?

Aside from reading the guidance, charities should strongly consider reviewing their internal conflicts of interest policy or in the event that one does not exist, create one as a matter of urgency.

An internal conflicts of interest policy is crucial to ensuring effective procedures are in place to manage the risks should a conflict arise. It can also safeguard a charity should the Charity Commission start asking unwanted questions concerning the charity’s activities.

Should you require further information about the new guidance or want clarification as to whether you are cooperating with it, please do not hesitate to contact our Charities team.

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